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  • Guided Allocation

    Too Early to Go Bargain Hunting

    David Schassler ,Portfolio Manager
    January 16, 2019
     

    VanEck NDR Managed Allocation Fund (NDRMX) tactically adjusts its asset class exposures each month across global stocks, U.S. fixed income, and cash. It utilizes an objective, data-driven process driven by macroeconomic, fundamental, and technical indicators developed by Ned Davis Research ("NDR"). The Fund invests based on the weight-of-the-evidence of its objective indicators, removing human emotion and decision making from the investment process. The expanded PDF version of this commentary can be downloaded here.

    Weight-of-the-Evidence Summary

    Weight-of-the-evidence bearish on stocks.

    • Many of the macroeconomic and fundamental indicators are bearish. Defensive sector leadership and slowing economic growth are all risk factors. Global monetary policy is tightening, but remains accommodative relative to historical levels.
    • The technical indicator composite is extremely bearish. This includes negative price momentum, weak market breadth, stock/price mean reversion, and seasonality.
    • Investor sentiment is extremely pessimistic, a contrarian bullish signal for equities. This indicates a potential buying opportunity may be coming.

    Performance and Positioning

    The VanEck NDR Managed Allocation Fund (the “Fund”) returned -4.01% versus -3.47% for its benchmark of 60% global stocks (MSCI All Country World Index) and 40% bonds (Bloomberg Barclays US Aggregate Bond Index) in December.*

    Last month, global stocks returned -7.04% and U.S. bonds returned +1.84%. The Fund’s near-benchmark positioning contributed minimally to relative performance. Regional equity positioning detracted. It was overweight the U.S., which hurt, and overweight the Emerging Markets, which helped. The Russell 3000 Index and the MSCI Emerging Markets Index returned -9.31% and -2.66%, respectively. Within the U.S., the Fund benefited from its overweight exposure to large-cap over small-cap stocks. The Russell 1000 Index outperformed the Russell 2000 Index by 2.77%.

    The Fund reduced its equity allocation from 57% to 31%. The indicators are measuring a period of heightened risk for global equities. Stock/bond indicators that recently changed, include stock/price mean reversion (from bullish to bearish), investor sentiment (from bullish to neutral), and seasonality (from neutral to bearish).

    Total Returns (%) as of December 31, 2018
      1 Mo YTD 1 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    -4.01 -8.13 -8.13 4.16
    Class A: Maximum 5.75% load -9.52 -13.42 -13.42 1.85
    60% MSCI ACWI/
    40% BbgBarc US Agg.
    -3.47 -5.22 -5.22 5.16
    Morningstar Tactical Allocation
    Category (average)2
    -4.75 -7.89 -7.89 3.14

    Total Returns (%) as of Sep. 30, 2018
      1 Mo YTD 1 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    -0.10 0.85 4.90 8.77
    Class A: Maximum 5.75% load -5.86 -4.95 -1.12 6.12
    60% MSCI ACWI/
    40% BbgBarc US Agg.
    0.03 1.97 5.68 9.02
    Morningstar Tactical Allocation
    Category (average)2
    -0.25 1.76 5.57 8.01

    The tables present past performance which is no guarantee of future results and which may be lower or higher than current performance. Returns reflect applicable fee waivers and/or expense reimbursements. Had the Fund incurred all expenses and fees, investment returns would have been reduced. Investment returns and Fund share values will fluctuate so that investor’s shares, when redeemed, may be worth more or less than their original cost. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at net asset value (NAV). An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. Index returns assume that dividends of the Index constituents in the Index have been reinvested.

    Returns less than a year are not annualized.

    Expenses: Class A: Gross 2.33%; Net 1.39%. Expenses are capped contractually until 05/01/19 at 1.15% for Class A. Caps excluding acquired fund fees and expenses, interest, trading, dividends, and interest payment of securities sold short, taxes, and extraordinary expenses.

    Weight-of-the-Evidence

    Wild market swings, inverted yield curves, widening credit spreads, slowing global growth, contracting monetary policy, and global trade wars are not the stuff of which healthy markets are made. It is now a battle between the “buy the dip” and “run and hide” crowds.

    Studying the history of market corrections may help provide an understanding of where markets may go from here. First, severe market corrections in the S&P 500 Index (15% or more) are uncommon. Since 1928, they have occurred only 0.5% of the time. The S&P 500 Index is currently in a severe market correction. As of January 7, it was down approximately 13.6% from its peak on September 20. So far, at its worst point, the maximum drawdown has been 19.36%. Historically, on average, severe corrections turn into bear markets (20% or more) 58% of the time, last 191 days, and investors lost 28.2% of their wealth. If history is any guidepost, there may be more pain to come.

    Anatomy of a Correction: Putting Q4 in Perspective
    Declines in the S&P 500 Index (1/3/1928 to 1/2/2019)

      Dip
    (5% decline or more)
    Moderate Correction
    (10% decline or more)
    Severe Correction
    (15% decline or more)
    Bear Market
    (20% decline or more)
    Number of Occurrences 308 97 43 25
    Mean Number of Occurrences Per Year 3.4 1.1 0.5 0.3
    Mean Number of Days 36 101 191 299
    Mean Decline(%) 10.9 19.4 28.2 35.7
    Chances of Decline Moving to Next Stage(%)* 31 44 58 N/A

    * = e.g. The chance of a 10% decline turning into a 15% decline, etc. N/A = Not Applicable.

    Source: Ned Davis Research. Data as of January 2, 2019. Past performance is no guarantee of future results. Chart is for illustrative purposes only. Copyright 2019. Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers, refer to www.ndr.com/vendorinfo/.

    The markets fear a global recession. Specifically, a global recession that the world may be ill-equipped to fight given the governments limited monetary and fiscal stimulus options. Hence, the intense scrutiny over every data-point (PMIs, corporate earnings and guidance, etc.) and potential catalyst (monetary missteps, trade war, etc.) that confirms, denies, or exacerbates this fear. Ned Davis Research has a GDP-weighted Global Recession Probability Model that incorporates both the level and trend of data from the Organisation for Economic Co-operation and Development (OECD) Composite Leading Indicators. A score above 70 indicates a high recession risk and a score below 30 indicates a low recession risk. The score right now is above 90. Not an encouraging sign!

    The Market Fears a Recession (and It Should)
    NDR Global Recession Probability Model (1987 to 2018)

    NDR Global Recession Probability Model (1987 to 2018)

    Source: Ned Davis Research. Data as of December 31, 2018. Past performance is no guarantee of future results. Chart is for illustrative purposes only. Copyright 2019. Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers, refer to www.ndr.com/vendorinfo/.

    For us, following the data provides clarity. It allows us to remain grounded when others may not: no emotion, no subjectivity. Right now, our data points to lower stock prices. The Fund reduced risk in the fourth quarter. Unfortunately not enough. Leading into December, extreme investor sentiment seemingly created a buying opportunity that did not materialize. The intensity of the selloff increased, leading us to further reduce exposure. Bear markets, as we all know, are full of ferocious swings. The realized volatility of the market, as calculated by 20-day rolling standard deviation, is around 30. This is approximately double its long-term average. Yet another ominous sign. At this point, we believe it is too early to go bargain hunting.

    NDR Indicator Summary, January 2019

      Macro/Fundamental Technical Overall
    Stocks, Bonds, or Cash      
    Stocks (vs. Bonds) Neutral Neutral Bearish
    Bonds (vs. Cash) Bullish Bullish Bullish
     
    Global Regional Equity      
    U.S. Neutral Neutral Neutral
    Canada Neutral Bearish Bearish
    U.K. Bearish Neutral Bearish
    Europe ex. U.K. Bearish Bullish Neutral
    Japan Bearish Neutral Bearish
    Pacific ex. Japan Bearish Neutral Bearish
    Emerging Markets Bearish Bullish Neutral
     
    U.S. Cap & Style      
    Large-Cap Bullish Bullish Bullish
    Small-Cap Bearish Bearish Bearish
    Growth Bullish Bullish Bullish
    Value Bearish Bearish Bearish

     

    Asset Class Positioning vs. Neutral Allocation, January 2019

    Asset Class Positioning vs. Neutral Allocation, January 2019

    The neutral allocation, which is provided by Ned Davis Research, Inc., represents the starting point of the Fund’s model absent an alternative recommendation once the model takes into consideration the indicators that yield the global tactical allocation model. These are not recommendations to buy or sell any security.