In this article, I will discuss the performance of my multi-asset investment strategy in January and update the model recommendations for February.
Model Performance in January 2011
In January, we saw some differences among performance of risky assets. Equities in developed markets continued their ascents as the economic growth was gaining more momentum. Emerging markets performed poorly. Inflation concerns, monetary policy tightening and political uprisings in Tunisia and Egypt dampened the demand for EM assets. Gold had a particularly tough month. More and more investors expected the loose monetary policies in the developed world were coming to an end. Commodities had a positive month. USCI outperformed DJP by 3.2%. The backwardation and momentum strategy worked better than the passive index. REITs outperformed other asset classes. U.S. housing data were better than expected. The Multi-Asset Timing Strategy (MATS) earned 0.2%, underperforming 60/40 equity / bond benchmark by 1.1% as a result of the poor performance of EM and gold. Table 1 shows the details of the strategy performance.
Table 1: Performance of MATS vs. 60/40 Equity/Bond Benchmark
(January 2011)
| Performance | Portfolio Allocation | Performance | ||
| Jan-11 | Jan-11 | |||
| MATS Portfolio | 0.2% | |||
| Benchmark | 1.4% | |||
| Excess Return | -1.1% | |||
| Excess Return Since Inception in Dec 10 | 0.9% | |||
| Domestic Equity | ||||
| SPY | 20% | 2.3% | ||
| Foreign Equity | ||||
| EFA | 15% | 1.8% | ||
| Emerging Market Equity | ||||
| EEM | 15% | -3.8% | ||
| High Yield Bond | ||||
| HYG | 10% | 1.7% | ||
| Emerging Market Bond | ||||
| EMB | 10% | -1.0% | ||
| Commodity | ||||
| USCI | 5% | 4.1% | ||
| DJP | 5% | 0.9% | ||
| Gold | ||||
| GLD | 10% | -6.4% | ||
| REIT | ||||
| IYR | 10% | 4.0% | ||
| Bond | ||||
| AGG | 0% | -0.1% | ||
| Cash | T-Bill | 0% | 0.01% |
Recommendations for February 2011
The ISM Manufacturing Index was reported at 60.8, beating expectation on February 1. The spread between ten-year Treasury rate and 3-month T-Bill has widened by 4 bps to 3.29% since last month. The prices of the all the risky assets are above their 200-day moving averages and my proprietary indicators. My economic view remains the same. I still believe the economy is in the second phase of expansion. Economic activities and corporate profits will continue improving. Though job markets have not gotten much better, it is a lagging indicator. The Egyptian unrest will create more volatility in the markets, but I don’t believe it will derail the market trends. Egypt is a small economy, and is not an oil-exporting country. As a result, I continue recommending over-weighting risky assets.
Based on some readers’ suggestion, I will divide risky assets into two categories: risky assets such as stocks and high yield bonds, and inflation assets such as commodity, gold and real estates to be more precise. Also, I will replace EEM with VWO as VWO has a much lower expense ratio of 0.27% vs. 0.69% of EEM. Furthermore, I will maintain the target allocation of 5% to gold rather than 10% recommended by the model. Gold price is above its 200-day moving average, but below its 100-day moving average. In my view, gold price could drop a lot if there is any indication that central banks may start tightening monetary policy.
My recommendations for February 2011 are summarized as follows:
· Risky assets (70%)
o S&P 500 Index (SPY): 20%
o MSCI EAFE Index (EFA): 15%
o MSCI Emerging Market Index (EEM): 15%
o IBOXX High Yield Bond Index (HYG): 10%
o J.P Morgan Emerging Market Bond Index (EMB): 10%
· Inflation assets (25%)
o Dow Jones UBS Commodity Index (DJP): 5%
o United States Commodity Index (USCI): 5%
o Gold Index (GLD): 5%
o Dow Jones US REIT (IYR): 10%
· Bonds (5%)
o Barclays US Aggregate Bond Index (AGG): 5%
o US 3-month Treasury Bill: 0%.
Disclosure: I am long SPY, EFA, HYG, IYR, AGG.
