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  • Smart Money Asset Allocation Review 0 comments
    Jan 24, 2010 3:52 PM | about stocks: SPY, EFA, EEM, IYR, ICF, CSJ, CIU, CRED, HYG, JNK, SHY, IEF, TLT, GLD, DBA, GSG

    Recent market volatility marked the first serious drop since November last year. It is timely to review how smart investors have prepared and reacted to such a change. The following analysis is based on ValidFi's real time asset allocation analysis tool for mutual funds. First, let's take a look at several best performing moderate asset allocation funds in the last 3 years. The following are beta (asset exposure) changes of the stock market (using Vanguard Total Stock Market Index VTSMX as the proxy) for moderate allocation funds Janus Balance (MUTF:JABAX), FPA Crescent (MUTF:FPACX), Waddell & Reed Asset Strategy (MUTF:WYASX) and Ivy Asset Strategy (MUTF:WASYX). Notice also the beta reduction does not mean the manager actually makes a physical asset reduction in his portfolio. It could mean that his portfolio has been positioned defensively (such as more heavily in defensive sectors such as consumer staples). Same is true for beta increase also.

    jabax_1202010

    fpacx_01202010

    wyasx_01202010

    wasyx_01202010

    Taking into account S&P 500 index (NYSEARCA:SPY)'s 2% year to date drop, one could see that all of these funds have reduced their exposure to equity somewhat. Notice further that other than FPACX, the other three funds reduced their exposure right at the beginning of year. Such a move apparently reveals the year end asset rebalancing. It seems to be very prudent and timely to make such reductions (or a rebalancing act). Also, notice both Waddell & Reed and Ivy made drastic reductions on days 1/14 and 1/15. On the other hand, if we look at funds with under exposure going to the new year, such as Vanguard Wellesley Income (MUTF:VWINX) and GMO Benchmark-Free Allocation (MUTF:GBMFX), these funds actually increased their equity exposures during this correction period:
    vwinx_01202010
    gbmfx_01202010

    Currently, ValidFi's Guru Asset Allocation Clone with Diversified Bonds portfolio has the following asset mix: 25% short term bond allocation (SHY and CSJ), 7.41% high yield bond (HYG or JNK) and the rest is in stocks (SPY, EFA, EEM), REIT (IYR or ICF) and gold GLD.

    holdingpiechart_P_Guru_Asset_Allocation_Clone_with_Diversified_Bonds
    All in all, from the above, we could infer that smart money managers do not expect a drastic stock market melt down (at least at this moment) while they are making timely move to adjust their asset exposure to the right mix. One should definitely reduce equity exposure if he/she has over exposure to this asset. On the other hand, for those whose equity exposure has been under the target allocation,  it might be prudent to gradually increase the allocation.

    Disclosure: No positions

    Stocks: SPY, EFA, EEM, IYR, ICF, CSJ, CIU, CRED, HYG, JNK, SHY, IEF, TLT, GLD, DBA, GSG
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