The Use For Portfolio Models: Asset Allocation Daily

Summary

• Neuberger Berman: Insurance-linked securities provide diversification from traditional asset classes and attractive risk-adjusted returns.
• BlackRock argues for a balanced asset allocation, tilted toward equities, especially emerging markets and U.S. stocks.
• Thought For The Day: For an exercise in investment analysis to be useful, it ought to provide concrete asset allocation advice.

State Of The Bond Market

“The last update on personal consumption, 70% of the entire economy, is for the November 2018 reporting period. We are now in February so the Treasury market, in a sense, has been flying blind as to the direction of the economic data and thus, meandering in a range until conclusive evidence is reported.” (Eric Basmajian)

Insurance-Linked Securities

“Traditionally, natural catastrophe risk has been the domain of the insurance and reinsurance industries. In recent decades, however, the capital markets have begun taking on a greater role in natural catastrophe risk in the form of ILS. We believe ILS provide genuine diversification from traditional asset classes and offer attractive risk-adjusted returns.” (Neuberger Berman)

2019 Outlook

“Our base case: A modest easing of financial conditions globally is likely sufficient to stabilize growth in the second half of 2019. Any decisive move in global monetary and fiscal positions toward a more growth-friendly stance could trigger a renewed bull market, we believe. Yet, we still argue for a carefully balanced investment approach. This includes taking risks where they are being sufficiently rewarded. Cash is less attractive than equities and bonds. Bonds offer slightly higher returns and significantly greater diversification benefits than they did in 2018. We prefer equity over credit, and emerging markets over developed markets outside of the U.S.” (BlackRock)

Thought For The Day

A news blurb on Nasdaq’s site reports that JP Morgan says “a 2020 recession won’t happen.” Well, that’s a relief! I’ve not seen the full JP Morgan analysis. I’ve actually seen some really impressive analysis from them in the past, so I assume it is brimming with insights. But investors’ take home message is usually the headline, and this one was not helpful. I’m sure the JP Morgan analyst was the first to say that 101 things could happen between now and next year that would change everything.

The future is opaque, veiled in ambiguity, but the world of commerce is mercenary and based on expedience. What that means in practice is that the investment world is a business. People in the business are selling things. Have you ever wondered why all these highly trained and articulate analysts are sharing their views with you? They’re demonstrating that their firms are “thought leaders,” with whom you’d do well to repose your life savings.

And so the stream of their leaderly thoughts flow on 24/7. Investors gobble this stuff up, develop trust in these firms and their oracular analysts, and eventually park their money with them. I’m not saying this is bad – many of these folks do their jobs well. But I see it as part of my job to inculcate critical thinking among investors, which in this case includes pointing out that just because one of the biggest asset managers in the world tells us a big economic decline is not forthcoming this year or next does not really mean we’re off the hook. They know that no one next year will display “2020” vision with regard to what they consumed for lunch on Feb. 5, 2019, nor what they consumed for their macroeconomic analysis that day.

For an exercise in investment analysis to be useful, it ought to provide concrete asset allocation advice. I think BlackRock’s 2019 base case, quoted above, is closer to the mark in that regard. It offers a view of where trends appear to be headed, and overweight and underweight recommendations on that basis (the above-linked article offers these details). For example, Blackrock overweights U.S., emerging market and Asia ex-Japan equities, and underweights European stocks and bonds, while maintaining neutral positions in most everything else. Its analysist Richard Turnill offers reasons, which by and large seem plausible.

While my own “base case” is an equal-weight portfolio of stocks, real estate and cash, I recognize that there is generally always a need for new inputs. What starts out equal-weighted never stays that way, as assets rise and fall. As the need to deploy some of the cash building up in the portfolio ensues, it is worthwhile having some go-to thought leaders whose views you can consider as the market meanders its way to the future (recession-free – not guaranteed – for the next two years)!

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