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  • Guided Allocation

    Trade War Leads to Resurgence of Risk

    David Schassler ,Portfolio Manager
    June 17, 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

    Indicators suggest end of bull market may be close.

    The VanEck NDR Managed Allocation Fund (the “Fund”) returned -4.00% vs. -2.80% for its blended 60/40 benchmark. Risk returned to the market, and the Fund is reacting. The Fund’s stock allocation was reduced from 72% to 34%, its bond allocation increased from 33% to 66%, and its cash allocation remained minimal. The catalyst for the resurgence of risk is the escalation of the trade war between the U.S. and China. While the trade war may be the topic du jour, from our perspective, investors should expect a heightened risk regime for some time to come, which is typical for the late stage of the market cycle. There is plenty of evidence, including slowing economic and earnings growth, which leads us to believe that we are in such a late stage. If you couple these data points with a stock market that cannot stay above its long-term trends, it is not a big leap to claim that we are currently in an equity bear market.

    Total Returns (%) as of May 31, 2019
      1 Mo YTD 1 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    -4.00 2.98 -4.12 4.58
    Class A: Maximum 5.75% load -9.53 -2.95 -9.62 2.58
    60% MSCI ACWI/
    40% BbgBarc US Agg.
    -2.80 7.68 2.37 7.02
    Morningstar Tactical Allocation
    Category (average)1
    -3.52 5.04 -2.61 4.46

    Total Returns (%) as of December 31, 2018
      1 Mo YTD 1 Year Since Inception
    Class A: NAV
    (Inception 5/11/16)
    1.20 5.24 -1.85 5.65
    Class A: Maximum 5.75% load -4.61 -0.82 -7.49 3.51
    60% MSCI ACWI/
    40% BbgBarc US Agg.
    1.56 8.54 3.93 7.72
    Morningstar Tactical Allocation
    Category (average)1
    1.11 7.14 0.27 5.17

    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 1.83%; Net 1.36%. Expenses are capped contractually until 05/01/20 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

    Although not all, the majority of the evidence now points to lower stock prices. Here is a review of the risks in the market as measured by the model.

    Economic activity is slowing. Below is the NDR Global PMI Breadth Indicator. The colors represent quarterly point changes. Simply, red is bad (slowdown) and green is good (growth). This indicator has been warning us to be cautious since April 2018.

    Economic Activity Slowing: NDR Global PMI Breadth Indicator
    Quarterly Change as of May 31, 2019
    VENDR_PMI_BLG_June19.jpg

    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/.

    Earnings growth is slowing. As you can see from the chart below, the red line (trailing 12-month earnings) has been trending downwards. Additionally, in May, analysts have begun revising their forward earnings estimates downwards as well (declining blue bars).

    Earnings Growth Slowing: MSCI ACWI Trailing Earnings and Positive Earnings Revisions

    VENDR_Earnings_BLG_June19.jpg

    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/.

    Global market breadth has deteriorated significantly. This is a measure of medium-term global stock market. Strong stock markets are typically associated with higher participation, and vice versa. This indicator turned bearish at the beginning of May.

    Global Breadth Turned Bearish
    80-Day ACWI Market Breadth (January 2018 to May 2019)

    Data as of May 31, 2019. 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/.

    Long-term trends are struggling to stay positive. This chart shows the long-term relative momentum between stocks and bonds. It most recently turned bearish in late May, but has been struggling to stay positive since June 2018.

    Long-Term Trends Struggling
    120-Day ACWI Momentum (January 2018 to May 2019)

    Data as of May 31, 2019. 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/.

    Credit spreads have remained relatively tight. This is a good sign for risky assets, including stocks. Spreads widened a bit during the selloff of late 2018, but have since recovered. Widening credit spreads are typically associated with systemic risk events.

    Tight Credit Spreads: A Bullish Signal
    Global High Yield Corporate Avg. Spreads (December 2015 to May 2019)
    VENDR_Spreads_BLG_June19.jpg

    Data as of May 31, 2019. 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/.

    And, lastly, the cyclical sectors are still maintaining dominance, but barely. The NDR SHUT Indicator measures the relative health of the cyclical and defensive sectors. SHUT is an acronym for Staples, Healthcare, Utilities and Telecommunications and represents the defensive sectors. Typically, healthy markets are led higher by the cyclical sectors. This indicator turned bearish in July 2018, turned bullish in early February and now appears to be on its way to turning bearish again.

    Cyclical Sectors Outperforming Defensive...But Barely
    NDR SHUT Indicator (January 2018 to May 2019)

    Data as of May 31, 2019. 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 end result, based on the preponderance of bearish indicators, is a portfolio that is meaningfully underweight stocks. The market is in a precarious position. If the selloff worsens, it would not be difficult for either some or all of the remaining bullish indicators to turn bearish and push the Fund into an even more defensive posture. Alternatively, a rapid reduction in risk will lead the Fund to a higher exposure to stocks.

    NDR Indicator Summary, June 2019

      Macro/Fundamental Technical Overall
     Stocks, Bonds, or Cash      
     Stocks (vs. Bonds) Bearish Bearish Bearish
     Bonds (vs. Cash) Bullish Bullish Bullish
     
     Global Regional Equity      
     U.S. Bullish  Bullish Bullish
     Canada Neutral Neutral Neutral
     U.K. Neutral Neutral Neutral
     Europe ex. U.K. Bearish Neutral Bearish
     Japan Bearish Bearish Bearish
     Pacific ex. Japan Neutral Neutral Neutral
     Emerging Markets Bearish Bearish Bearish
     
     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, June 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.

    IMPORTANT DISCLOSURES

    *All weighting comparisons are relative to the blended benchmark (60% MSCI ACWI/40% Bloomberg Barclays US Agg.) or neutral allocation. This represents the starting allocation point absent an alternative recommendation once the model takes into consideration the indicators that yield the global tactical allocation model.

    1Morningstar category averages are equal-weighted category (total) returns. The calculation is the average of the total returns for all funds in a given category. The standard category average calculation is based on constituents of the category at the end of the period. Total return reflects performance without adjusting for sales charges or the effects of taxation, but is adjusted to reflect all actual ongoing fund expenses and assumes reinvestment of dividends and capital gains. If adjusted, sales charges would reduce the performance quoted.

    The Morningstar Tactical Allocation category includes portfolios that seek to provide capital appreciation and income by actively shifting allocations across investments. These portfolios have material shifts across equity regions, and bond sectors on a frequent basis. To qualify for the tactical allocation category, a fund must have minimum exposures of 10% in bonds and 20% in equity. Next, a fund must historically demonstrate material shifts in sector or regional allocations either through a gradual shift over three years or through a series of material shifts on a quarterly basis. Within a three-year period, typically the average quarterly changes between equity regions and bond sectors exceeds 15% or the difference between the maximum and minimum exposure to a single equity region or bond sector exceeds 50%. As of March 31, 2019, the Fund ranked 133 out of 273 funds for the 1 month period; 201 out of 273 funds for the YTD period; 203 out of 269 funds for the 1 Year period; and 130 out of 253 funds since inception. As of May 31, 2019, the Fund ranked 186 out of 284 funds for the 1 month period; 218 out of 245 funds for the YTD period; 195 out of 280 funds for the 1 Year period; and 149 out of 262 funds since inception.

    2The Fund’s benchmark is a blended unmanaged index created by the Van Eck Associates Corporation (the “Adviser”) consisting of 60% MSCI All Country World Index (ACWI) and 40% Bloomberg Barclays US Aggregate Bond Index. The MSCI ACWI captures large- and mid-cap representation across 23 developed markets (DM) and 24 emerging markets (EM) countries and covers approximately 85% of the global investable equity opportunity set. The Bloomberg Barclays US Aggregate Bond Index is a broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. This includes treasuries, government-related and corporate securities, mortgage-backed securities, asset-backed securities and collateralized mortgage-backed securities.

    Global stocks are measured by the MSCI ACWI and U.S. bonds are measured by the Bloomberg Barclays US Aggregate Bond Index. Large-cap stocks are measured by the Russell 1000 Index, an index of the largest 1,000 companies in the Russell 3000 Index. The Russell 1000 Index comprises over 90% of the total market capitalization of all listed U.S. stocks. Small-cap stocks are measured by the Russell 2000 Index, an index which measures the performance of the smallest 2,000 companies within the Russell 3000 Index. Value stocks are measured by the Russell 3000 Value Index, a market-capitalization weighted equity index based on the Russell 3000 Index, which measures how U.S. stocks in the equity value segment perform. Included in the Russell 3000 Value Index are stocks from the Russell 3000 Index with lower price-to-book ratios and lower expected growth rates. Growth stocks are measured by the Russell 3000 Growth Index, a market capitalization weighted index based on the Russell 3000 Index. The Russell 3000 Growth Index includes companies that display signs of above average growth. Companies within the Russell 3000 Index that exhibit higher price-to-book and forecasted earnings are used to form the Russell 3000 Growth Index. U.S. stocks are measured by the Russell 3000 Index which is a capitalization-weighted stock market index that seeks to be a benchmark of the entire U.S stock market. It measures the performance of the 3,000 largest publicly held companies incorporated in America and is based on market capitalization. The MSCI Europe ex UK Index captures large and mid cap representation across 14 developed markets (DM) countries in Europe. The MSCI Canada Index is designed to measure the performance of the large and mid cap segments of the Canada market. The MSCI Pacific ex Japan Index captures large and mid cap representation across 4 of 5 developed markets (DM) countries in the Pacific region (excluding Japan). Emerging Markets stock are measured by the MSCI Emerging Markets Index which captures large and mid cap representation across 24 emerging markets (EM) countries. The MSCI United Kingdom Index is designed to measure the performance of the large and mid cap segments of the UK market. The S&P 500® Index consists of 500 widely held common stocks, covering four broad sectors (industrials, utilities, financial and transportation). International stocks are measured by the MSCI EAFE captures large and mid cap representation across 21 developed markets countries around the world, excluding the US and Canada. U.S. Dollar Index (DXY) indicates the general international value of the U.S. dollar. The DXY does this by averaging the exchange rates between the U.S. dollar and six major world currencies: Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish kroner, and Swiss franc. Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and these opinions may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

    All indices are unmanaged and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in the Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of the Fund’s performance. Indices are not securities in which investments can be made. Results reflect past performance and do not guarantee future results.

    You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program rather than a complete program. Because the Fund is a “fund-of-funds,” an investor will indirectly bear the principal risks of the exchange-traded products in which it invests, including but not limited to, risks associated with cash and cash equivalents, debt securities, exchange traded products, exchange traded products’ underlying investments, below investment grade securities, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, common stock, concentration, derivatives, emerging markets, investment style, small- medium and large-capitalization companies, limited number of holdings, market, model and data, operational, portfolio turnover and regulatory risks. The Fund will bear its share of the fees and expenses of the exchange-traded products. Consequently, an investment in the Fund entails more direct and indirect expenses than a direct investment in an exchange-traded product. Because the Fund invests in exchange-traded products, it is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of an exchange-traded product’s shares may be higher or lower than the value of its underlying assets, there may be a lack of liquidity in the shares of the exchange-traded product, or trading may be halted by the exchange on which they trade. Principal risks of investing in foreign securities include changes in currency rates, foreign taxation and differences in auditing and other financial standards. Debt securities may be subject to credit risk and interest rate risk. Investments in debt securities typically decrease in value when interest rates rise.

    Please call 800.826.2333 or visit vaneck.com for performance information current to the most recent month end and for a free prospectus and summary prospectus. An investor should consider the Fund’s investment objective, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this as well as other information. Please read them carefully before investing.