How Good is a Traditional Stock and Bond Portfolio in this Market?

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VanEck

ROLAND MORRIS: Hello, I’m Roland Morris, the firm’s Commodity Strategist. I’m here today with David Schlassler, who heads up our PARS Group, our Portfolio and Risk Solutions Group. Today we’re here to discuss some new products we’ve developed for investors; we refer to them as Guided Allocation products. David, tell me some of the thoughts you have about these Guided Allocation products and what’s leading the charge into this area of investing.

DAVID SCHASSLER: Each fund, if you think about each fund independently, they share one common philosophy, and that’s there’s certain periods when investors want to be invested, which is most of the time. But there’s certain periods when you don’t want to be invested. So each of these strategies helps investors with that most important decision, which is, do you want to be invested now or don’t you want to be? And when you don’t want to be invested, there are certain periods when it’s better not to be invested; during those periods we’ve found that cash is truly the only risk-off asset.

We identify those periods of time with objective data-driven indicators to remove the human emotion out of the process. So the whole idea is be invested most of the time, get paid a positive risk premium to hold those assets. And then there’s certain periods when you want to be really defensive. And during those periods we will own up to 100% cash in each of these products.

MORRIS: David, could you explain in brief, the three products that we’ve developed that are now available to investors?

SCHASSLER: So the first product is the VanEck NDR Managed Allocation Fund. This is a global tactical asset allocation fund that helps investors determine, do you want to be in stocks, bonds, or cash? The neutral allocation is 60% in stocks, 40% in bonds. And then we pivot up and down based off how much risk is in the market.

Market Realist

Global markets surged in 2017

Global markets (ACWI) have been on a roller coaster ride since the presidential elections. Before the elections, investors were skeptical about seeing Donald Trump in the White House on fears that Trump’s administration wouldn’t benefit the US economy.

How Good is a Traditional Stock and Bond Portfolio in this Market?

However, things took a different turn after he was elected. The US stock market hit new highs, and global markets also benefitted. 2017 was the best year not only for US markets but also for global markets, as the chart above shows. Emerging markets were the top performers in 2017. Bond markets also enjoyed some gains in 2017, as you can see in the chart below.

How Good is a Traditional Stock and Bond Portfolio in this Market?

Yet this year hasn’t been very fruitful for either the stock (SPY)(IVV) or bond market. Tax reforms, trade war tensions between the United States and China, Fed rate hikes, and rising inflation fears took a toll on the stock market. The market crashed in February and March. A spike in volatility resulted in a drop in asset prices. The rate hikes led to an increase in the Treasury yield, affecting bond prices. The benchmark ten-year Treasury yield has risen 21% year-to-date as of August 30. In this current scenario, how would a traditional stock-and-bond portfolio work?

Traditional stock-and-bond portfolio allocation: How it works?

Stocks and bonds are different asset classes with their own pros and cons. The traditional 60-40 stock and bond allocation has been popular among investors. While the 60% allocation to equities provides investors with higher stock market gains, the 40% allocation to bonds acts as a cushion during stock market volatility. However, depending on investors’ appetite for risk and the market situation, they can also alter their allocation to gain better returns.

In the current economic scenario, with volatility spiking in both the equity and fixed-income markets, VanEck offers a tactical asset allocation fund, the VanEck NDR Managed Allocation Fund. It invests in domestic and foreign stocks, US fixed income securities, and cash and cash equivalents.