Multi-Asset Investment Strategy in May 2011: Follow the Trend

by: Henry Ma, CFA
In April, all the risky and inflation assets rallied significantly. With the uncertainties of the Japanese earthquake and unrest in Middle East and North Africa falling into the background, positive economic and corporate earning news grabbed investors’ attention. The European Central Bank raised interest rates for the first time since the great recession started to fight inflation. The Fed held its first ever press conference after the policy meeting, restating its dovish stand on monetary policy. The US dollar had slipped to the lowest level since 2008 prior to the financial crisis.
  • S&P 500 (NYSEARCA:SPY) Index rose by 2.9% for the month. The EAFE index performed better with a 5.6% gain as all the major currencies appreciated against US dollar. Emerging market equities had another good month, up by 3.4%.
  • Oil price continued its rally as the US dollar was weakening further and the MENA unrest was still unsettled. WTI crude oil, the US benchmark, reached $113.93 per barrel. Brent crude oil, the global benchmark, was traded at 125.89 at the end of April. Gold was shining again in the face of a weakening dollar, reaching another record high of $1563/oz on 4/29. The DJUBS commodity index gained 3.4%, mainly driven by the rising oil and gold prices. USCI underperformed DJP again by 2.0%. The active commodity strategy was beaten by the passive index in April.
  • REIT’s had a good month, up by 4.7%. The housing market activities were picking up though house prices had not found a bottom.
  • The high yield bond index was higher by 1.6% as interest rates moved lower. The dollar-denominated emerging market bonds gained 1.7% as well.
  • The Multi-Asset Timing Strategy (MATS) earned 3.6%, outperforming 60/40 equity/bond benchmark by 1.3% in April. Table 1 shows the details of the strategy performance. Since we started tracking the strategy in December 2010, the MATS has beaten the benchmark by 3.5%.
Table 1: Performance of MATS vs. 60/40 Equity/Bond Benchmark
(April 2011)
Portfolio Allocation Performance Performance
4/29/2011 4/29/2011 Since Inception
MATS Portfolio 3.6% 13.4%
Benchmark (60% SPY+40% AGG) 2.4% 9.9%
Excess Return 1.3% 3.5%
Domestic Equity
SPY 20.0% 2.9% 16.2%
Foreign Equity
EFA 17.5% 5.6% 17.7%
Emerging Market Equity
VWO 17.5% 3.4% 12.4%
High Yield Bond
HYG 10.0% 1.6% 8.3%
Emerging Market Bond
EMB 10.0% 1.7% 2.5%
ELD 4.5% 7.9%
USCI 5.0% 1.4% 23.4%
DJP 5.0% 3.4% 20.0%
GLD 5.0% 8.9% 12.5%
IYR 10.0% 4.7% 17.7%
AGG 0.0% 1.6% 0.9%
Cash T-Bill 0.0% 0.0% 0.0%
Click to enlarge
Recent economic data still suggest a continuing global economic expansion. The April ISM Manufacturing Index was reported at 60.4, better than economists’ forecast. The yield curve has flattened by 7 basis points since the end of March. The spread between the ten-year Treasury rate and 3-month T-Bill stays at a high level of 3.31%. The Fed has restated its dovish view on interest rates, insisting the recent rise in energy prices will be “temporary.” The prices of all the risky and inflation assets are above their 200-day moving averages and my proprietary indicators. The model continues to recommend overweighing risky and inflation assets.
The current market trends will likely continue until the Fed changes its policy stand or some exogenous events disrupt the global economic expansion. My recommendation for this month is to follow the trends, as market technicians say “Trend is your friend.” One reader recommended investing in ELD, an emerging market local currency bonds ETF. I think it makes some sense. The yield on ELD is 5.74%, which is higher than 5.47%, the yield of EMB, the US dollar-denominated emerging market bond ETF. ELD is also exposed to the emerging market currencies, which I think are good hedges against the declining US dollar. The 10% allocation will be split between EMB and ELD.
  • Risky assets (75%)
  • S&P 500 Index (SPY): 20%
  • MSCI EAFE Index (NYSEARCA:EFA): 17.5%
  • MSCI Emerging Market Index (NYSEARCA:VWO): 17.5%
  • IBOXX High Yield Bond Index (NYSEARCA:HYG): 10%
  • J.P Morgan Emerging Market US Dollar Bond Index (NYSEARCA:EMB): 5%
  • Wisdom Tree Emerging Market Local Bond (NYSEARCA:ELD): 5%
  • Inflation assets (25%)
  • Dow Jones UBS Commodity Index (NYSEARCA:DJP): 5%
  • United States Commodity Index (NYSEARCA:USCI): 5%
  • Gold Index (NYSEARCA:GLD): 5%
  • Dow Jones US REIT (NYSEARCA:IYR): 10%
  • Bonds (0%)
  • Barclays US Aggregate Bond Index (NYSEARCA:AGG): 0%
  • US 3-month Treasury Bill: 0%.
Disclosure: I am long VWO, EFA.