Multi-Asset Investment Strategy in August 2011

by: Henry Ma, CFA

The macroeconomic news in July weren’t all positive. Unemployment rate stayed stubbornly high at 9.2%. Economic recovery was surprisingly slow. The U.S. GDP grew at 1.3% annual rate in Q2, after a 0.4% pace in Q1. The debt ceiling debate and European sovereign debt concern continued posing uncertainties in the markets. Demand for safe haven assets soared and Ten-year Treasury rate dropped by 36 basis points. Japanese Yen and Swiss Franc appreciated substantially against U.S. dollar. Equities tumbled across the board as investors moved to hard assets for hedging the decline of U.S. dollar.

  • S&P 500 Index declined by 2.0% for the month. EAFE index performed a little worse with a 2.4% loss as Euro depreciated against U.S. dollar. Emerging market equities had a negative month, down by 1.0% as well.
  • Oil prices remained relatively stable after two-month of decline. WTI crude oil, the U.S. benchmark, declined to $95.70 per barrel. Brent crude oil, the global benchmark, was traded at $116.74 at the end of July. Against the backdrop of a declining dollar and debt-ceiling uncertainty, silver led the commodity rallies, jumping by 15%. Gold reached a new record, trading at $1627/oz. The DJUBS commodity index gained 4.0%, driven up by metals and grains. USCI, an active commodity strategy, rose by 4.1% as well.
  • REITs were up slightly by 0.2%. The fundamentals of commercial real estate improved slowly as the economy recovered.
  • High yield bond index rose slightly by 0.4% as interest rates moved lower. Emerging market debts performed well. The dollar-denominated emerging market bonds and local currency bonds both gained about 2.0%.
  • The Multi-Asset Timing Strategy (MATS) lost 0.2%, outperforming 60/40 equity/bond benchmark by 0.3%. 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 1.7%.

Table 1: Performance of MATS vs. 60/40 Equity/Bond Benchmark

(July 2011)

Portfolio Allocation Performance Performance
7/29/2011 7/29/2011 Since Inception
MATS Portfolio -0.2% 9.5%
Benchmark (60% SPY+40% AGG) -0.5% 7.8%
Excess Return 0.3% 1.7%
Domestic Equity
SPY 20.0% -2.0% 10.7%
Foreign Equity
EFA 20.0% -2.4% 11.0%
Emerging Market Equity
VWO 20.0% -1.0% 6.9%
High Yield Bond
HYG 10.0% 0.4% 8.2%
Emerging Market Bond
EMB 5.0% 2.0% 6.4%
ELD 5.0% 1.9% 9.7%
USCI 5.0% 4.1% 13.9%
DJP 0.0% 4.0% 11.4%
GLD 5.0% 8.4% 16.9%
IYR 10.0% 0.2% 15.4%
AGG 0.0% 1.7% 3.4%
Cash T-Bill 0.0% 0.0% 0.0%

Recent economic data has continued to show the global economies hit a soft patch. The U.S. economic growth and job creation have been disappointed. The July U.S. ISM Manufacturing Index was reported at 50.9, much worse than expected. In the meantime, the China Manufacturing PMI also slumped to 50.7. Although the recovery is slow, global economies are still expanding. The yield curve has flattened by 35 basis points in July. The spread between 10-year Treasury rate and 3-month T-Bill stays at 2.70%. The current slowdown, though temporary, could delay the Fed’s tightening cycle. The prices of all the risky and inflation assets except foreign stocks are above their 200-day moving averages. The model continues to recommend overweighing risky and inflation assets.

Last month, I recommended changing commodity allocation from overweight to neutral because it fell below its 200-day moving average. The commodity rally has move the current DJP price level above its 200-day SMA. Since EFA is trading below its 200-day SMA, I would recommend reducing EFA allocation by 5% and allocating 2.5% to DJP and 2.5% to AMJ, which is an ETN track the performance of JP Morgan Alerian Energy Master Limited Partnership Index. AMJ invests in the limited partnerships which own and operate energy assets. It has a 6% dividend yield and outperformed S&P Goldman Sachs Energy index by a large margin historically with a lower volatility (see graph below).

(Click to enlarge)

The allocation for August is:

· Risky assets (75%)

o S&P 500 Index (NYSEARCA:SPY): 20%


o MSCI Emerging Market Index (NYSEARCA:VWO): 20%

o IBOXX High Yield Bond Index (NYSEARCA:HYG): 10%

o J.P Morgan Emerging Market U.S. Dollar Bond Index (NYSEARCA:EMB): 5%

o Wisdom Tree Emerging Market Local Bond (NYSEARCA:ELD): 5%

· Inflation assets (25%)

o Dow Jones UBS Commodity Index (NYSEARCA:DJP): 2.5%

o JP Morgan Alerian MLP index (NYSEARCA:AMJ): 2.5%

o United States Commodity Index (NYSEARCA:USCI): 5%

o Gold Index (NYSEARCA:GLD): 5%

o Dow Jones U.S. REIT (NYSEARCA:IYR): 10%

· Bonds (0%)

o Barclays U.S. Aggregate Bond Index (NYSEARCA:AGG): 0%

o U.S. 3-month Treasury Bill: 0%.

Disclosure: I am long SPY, EFA, EEM, VWO, HYG.