Between flesh and what's fantasy
Possibly the best 10 minutes you'll spend today ... Bruce Springsteen - Jungleland (Live in New York 2001)
One of the constants in money management is the battle between flesh and fantasy, fact and fiction; there is rarely a black or white position. We work in world with a complicated mosaic of fundamentals, technicals, valuations, and human emotions; certainty is simply not attainable when forecasting the future.
Today's markets are dominated by macro news events that have led us to a Risk-on/Risk-off mentality, where all risk assets either rally or drop in unison. This manic behavior has forced many investors to take one of two views; step to the sidelines and sit on cash, or bury their heads in the sand and stick with their current asset allocation. At Rockhaven we believe that investors can, and should, aim for a more disciplined asset allocation. An asset allocation that is not betting all-in or all-out, and an allocation that is not ignoring the prevailing environment. We call it Global Tactical Asset Allocation, an allocation method that stays diversified, but also takes into consideration prevailing trends in all markets.
Years ago, legendary investor John Bogle said, "We must base our asset allocation not on the probabilities of choosing the right allocation but on the consequences of choosing the wrong allocation." In other words, extreme positions of putting on or taking off risk (going all cash or all stock), are highly risky and can lead to negative consequences. Active allocations, even in times of uncertainty, are the more prudent portfolio management strategy. Getting it right is not being all in or all out.
We have been in an environment of crisis since 2008, and it does not appear to be ending any time soon. It is a very emotional environment that throws investors between fear and euphoria (OK maybe more fear than euphoria).
Recently Barton Biggs suggested getting to know your emotional self to improve your investment results. "The investment process is only half the battle. the other weighty component is struggling with yourself and immunizing yourself from the psychological effects of the swings in the markets, career risk, the pressure of benchmarks, competition and the loneliness of the long distance runner...
Understanding the effect of emotion on your actions has never been more important than it is now. In the midst of this great financial and economic crisis that grips the world, central banks are printing money in one form or another. This makes our investment world even more prone to bubbles and panics than it has been in the past. Either plague can kill you."
It is exactly this type of environment that requires a disciplined, unemotional portfolio construction process.
Here's where we stand today in our Global Tactical Asset Allocation Portfolios:
US Equities -- 15% Neutral,
The US equity markets have rolled over a bit (they are about 8% off their highs). At this point US equity markets are not showing any strongly bullish or bearish trends.
Int'l Equities -- 3% Bearish,
both developed and emerging equity markets are in bearish territories. We remain at our minimal weight.
US REITs -- 6%
Bullish, we are still at our full US REIT target of 6%, but even they are trending towards neutral. REITs continue to be a huge beneficiary of the Feds ZIRP.
Int'l REITs -- 2% Bearish, international REITs have moved to bearish territory. After remaining in bullish trends longer than their international equity brethren they've finally succumbed.
Gold -- 5% Bearish, Gold has moved into bearish territory. Gold's trading range has been very narrow, but also fairly volatile.
Commodities -- 5% Bearish, economic weakness has caused commodities to fall (DBC is down 16% since March)
. There are some signs of bottoming, especially in grains, but still in bearish territory.
US Fixed Income -- 22% Bullish, US Treasuries have rallied to near record low yields again. High-yield bonds & MLP's have moved into neutral territory.
Int'l Fixed Income -- 2% Bearish, Even emerging market bonds have moved to minimum weight. We continue to avoid all European bonds.
Cash Equivalents & Currencies -- 40%, cash levels have increased dramatically, and are divided between the US at 38%, and 2% in China.
In Summary - In trying to determine what's flesh and what's fantasy, don't let your emotions take over, stick to your disciplines. We're not all-in or all-out, but we have a definite tilt to the conservative risk-off side of the ledger.
If you'd like to sit down and talk about the markets, and your current risk exposure in more detail, please give me a call.
Be careful out there, and keep the lights on,
Chris Wiles, CFA
412-260-7917
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This article contains the current opinions of the author but not necessarily those of the Rockhaven Capital Management. The author’s opinions are subject to change without notice. This article is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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