And you look at commodities as well, right now there’s an oversupply situation in oil. Oil prices have gone down a lot. You’re seeing gold responding well as a risk-off asset. There are a lot of risks in the market, and the markets are picking up on that, and the models are adjusting to that.
BUTCHER: VanEck has launched a number of guided allocation products. What’s the philosophy behind them?
SCHASSLER: These are all objective, data-driven products. The idea is, participate when things are going really well, but preserve when they’re not. Play offense when things are going in your favor, play defense when they’re not.
Each one of these products has three things in common. The first is it uses this comprehensive view. When I’m talking about a comprehensive view, it’s trying to measure risk. If you want to measure risk, you can’t just do it by looking at one or two things, you’ve got to look at a lot of different data. The second thing that these funds do is they remove emotion from the process. The last thing that the strategies do is they’re very adaptive and they’re very flexible. When you’re in a true risk-off event, these strategies can all raise up to 100% cash. When risk gets really high, these strategies will get very, very defensive and very, very defensive could be 100% cash at some point.
Oil prices and many other commodities surged for most of last year. However, oil prices starting declining in the fourth quarter as risks to the global economy increased.
Oil’s supply glut has also grown. As the first graph shows, the total rig count has risen over the last two years. This rise has resulted in crude oil prices plunging in the last few months, while risky assets’ prices have increased. These factors could continue to pressure oil prices this year.
Meanwhile, gold (OUNZ) has surged in recent months as risky assets have declined. In mid-2018, gold prices fell despite US real interest rates declining—historically, gold prices and real interest rates have been inversely related.
However, another factor has been at play here. As US equities (SPY) surged in the middle of last year, risk-off assets such as gold took a back seat. But when equities and other risk-on assets plunged, gold became in vogue again. Over the last 12 months, gold prices have had a correlation of -0.63 with SPY.
As risks rise, some market tools can add ballast to your portfolio. One such tool is VanEck’s Guided Allocation Suite, which can offer exposure to gains when markets rise and provide protection in risk-off scenarios. More on this tool in the next part.