Asset Class Flexibility Leads to Bullish Equity Exposure
GILLIAN KEMMERER: The VanEck NDR Managed Allocation Fund (“VENDR”) was developed by VanEck in partnership with Ned Davis Research to dynamically respond to market movements. Here to give us an update on VENDR is David Schassler, Portfolio Manager at VanEck and Lisa Michalski, Associate Director of Custom Research Solutions at Ned Davis Research. Thank you both so much for joining us here today. Dave I want to start with you, give us a quick overview of how VENDR works.
DAVID SCHASSLER: It is a global tactical allocation fund, really designed to outperform in up, down, and sideways market environments. We invest using big, liquid ETFs and we follow the model from Ned Davis Research. The model makes three decisions. The first of which is, do you want to be in stocks, bonds, or cash? The fund’s neutral allocation is 60% in stocks and 40% in bonds. But we can move a lot from that, if the weight of the evidence tells us to do so. If all of the evidence is very, very bullish, we can be as high as 90% stocks. Alternatively, if the sky is falling, we can own as little as 0% in any asset class. So there’s a lot of flexibility there.
KEMMERER: Where is the fund positioned right now?
SCHASSLER: We have an 81% allocation of stocks, so we are overweight right now. We think that there’s more room to run in this bull market. Lisa can talk about some of those indicators as well.
KEMMERER: Lisa, tell us a little bit about how this relationship got started with VanEck. Then tell us a bit about the indicators that are informing the positioning?
LISA MICHALSKI: As Dave mentioned, we run three independent models: stocks, bonds, and cash; regional equity; and U.S. cap and style. We had been looking for a partner in this space to bring our research to life as an investable product. So, in the fall of 2015, Dave came down to our offices in Florida and did due diligence on us and the rest is history.
KEMMERER: Tell us a little bit about the indicators that are informing the shifts of the fund right now.
MICHALSKI: I’m going to focus on the stock versus bond relationship, because it is the most important relationship in the framework. As Dave mentioned, the approach is objective and data driven. It’s fully automated and based on what we refer to as the “weight of the evidence” approach. It’s one of our mantras at Ned Davis Research. For the past two months, August and September, the fund has been relatively neutral, stocks versus bonds, because both the technical side and the macro fundamental side have agreed in terms of the neutral positioning. On the technical side we have a seasonality indicator which measures a rolling 20-year period of relative returns of stocks versus bonds and decides which months to call bullish and bearish for the coming year. On the macro fundamental side, we have a measure of defensive leadership in the market. We refer to that as our “SHUT Index.” SHUT stands for Staples, Healthcare, Utilities, and Telecom. We measure those on a global basis and those are the defensive sectors of the market. When we detect that defensive sectors are leading the market, we consider that a bearish signal. So, after a neutral positioning for the prior two months, seasonality lifted the first of the month, in October. Then the SHUT Index, also during the month of September, changed to signal defensives lag in the market. We received a bullish signal on the fundamental, macro fundamental side and also a move upward from bearish to neutral on the technical side. When we bring those together, now we’re at an overweight positioning for October.
KEMMERER: Dave, I want to talk a little bit about how the market has reacted to this product. It seems incredibly innovative. In the past 18 months when you’ve been on the road, what have people been saying to you about it?
SCHASSLER: It’s been fantastic. We’ve been speaking with a lot of the early adopters. These are Ned Davis subscribers, so people who have been following Ned Davis’ work for a long period of time. We found that those were the first early adopters. Now we’re really branching out, talking to people who maybe know Ned Davis, maybe don’t, and just educating them on the process. But we’re excited about this, we really are. The fund’s been performing in line with our expectations. It’s doing really well, so we look forward to it continuing.
KEMMERER: It is measuring something like sentiment, which is incredibly difficult to quantify in the marketplace right now.
MICHALSKI: Ned Davis is known for its sentiment work. In our U.S. sentiment composite, we build composites, the same way that we build composites to call asset allocation. An example would be taking put/call ratios, measures of polls, investor polls (so people who professionally manage money), asking them how they feel about the market, retail investors, asking them how they feel about the market, and volatility, so implied volatility, the VIX Index. All different measures of sentiment will go and comprise one composite. We have a daily U.S. sentiment composite that we run at Ned Davis Research, it’s one of our proprietary indices. We consider sentiment contrarian. So when investors are very, very optimistic about the market at extremes, we think of this as a negative or bearish sign. What we do is we measure extreme levels and we detect extreme levels and early reversals from those extreme levels. That’s a bearish signal for the market. And then, likewise, on the extreme pessimistic side, i.e. when investors are very, very pessimistic about the market, then we know it’s time to get ready to flash a bullish signal. And we detect early reversals.
KEMMERER: Excellent. Thank you both so much for taking the time to chat with us and thank you for giving us an update on VENDR.
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