All Weather Strategy (February 2020): Increase Bonds to 25% and reduce Japan equity to 5%

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• Celebrating 1 year of our All Weather Strategy with FINNOMENA!
• We’re in rough waters
• Review: Gold was the winner in the past three months
• Performance: All Weather Strategy has outperformed World equity
• Weights: Increase Bonds to 25% and reduce Japan equity to 5%
• Outlook: COVID-19 remains the biggest, but not the only concern
• Regional Equity FVMR Snapshot

Celebrating 1 year of our All Weather Strategy with FINNOMENA!

• The All Weather Strategy has now been up and running at FINNOMENA for 1 year
• We’re grateful for all the investors that have put the trust in our All Weather Strategy
• We’re also thankful for FINNOMENA offering us the opportunity to make the strategy available as a GURUPORT

We’re in rough waters

• The opening of 2020 has undoubtedly been rough for equity investors
• It’s not easy to sit still in the boat when the value of your portfolio falls massively in a day due to big drops in the stock market
• That’s why we created the All Weather Strategy; equity has had the highest long-term return, but the ride is bumpy, and we aim to cushion the downside by reducing the equity allocation at times

Review: It was all about COVID-19

• In our rebalancing in December 2019, we increased the target allocation of Japan to 25% from 5%, which hurt the return as Japan was the worst performer in the past 3 months
• Japan’s GDP growth plunged in 4Q19, surprising the market, and the country has gotten closer to a recession
• At the same time, Japan is the country with the fifth-highest number of confirmed COVID-19 cases in the world

Review: Panic in equities and pessimism in commodities

• In total, we had a 65% target allocation to equity, US equity had a 25% allocation, and it was among the worst performers as well
• Commodities besides precious metals performed relatively poorly in the past 3 months as well
• Oil and industrial metals fell as the global growth outlook worsened

Review: Pandemic panic led investors to defensive assets

• As COVID-19 has led to falling equity markets across the board and falling prices in many commodities, defensive assets, gold and bonds, performed well in the past 3 months
• Gold price shot up in the past 3 months as panic spread in the markets, and it was the best-performing asset by far

Past 3 months: Equity fell around the globe, the All Weather Strategy outperformed

Past performance/ performance comparison relating to a capital market product is not a guarantee of future results.

• AWS: Outperformed World equity by 3.4%
• Gold: COVID-19 panic has pushed up the gold price
• US: Strongest in the Developed world
• Japan: Worst performer due to recession fears and COVID-19 outbreak

Since inception: The strategy has outperformed World equity

Past performance/ performance comparison relating to a capital market product is not a guarantee of future results.

• The All Weather Strategy had a 45% equity allocation from inception to September 2019, and 65% after that
• The high gold allocation has paid off recently as it has lowered the downside compared to an equity-only strategy

Since inception: The volatility of AWS has been about 65% of the volatility of World equity

• The volatility of AWS has been about 65% vs. the volatility of World equity
• 25% bond allocation until September 2019 has contributed to the low volatility of AWS
• As gold is uncorrelated to equity, it has dampened the overall AWS volatility

Since inception: Has AWS lost less when World equity has fallen

Past performance/ performance comparison relating to a capital market product is not a guarantee of future results.

• A key feature of AWS is that it aims to lose less when equity markets fall
• Looking at the 10 worst days of World equity since the inception of AWS, the has strategy has lost less on every day so far
• Much due to low equity weight and gold allocation

Since inception: AWS has mainly outperformed when World equity has suffered big drops

Past performance/ performance comparison relating to a capital market product is not a guarantee of future results.

• Largest outperformance has been in the months of Feb-20, May-19, and Aug-19 when World equity has fallen the most
• Gold and bonds served as an effective hedge in the two months in 2019, and gold worked as a hedge in Feb-20 as well

Weights: Increase Bonds to 25% and reduce Japan to 5%

• Equity down to 45%
• US equity remains at high valuations, but this is similar to a neutral weighting for the US within our equity allocation
• Gold and Bonds to serve as an effective hedge if equity markets continue to fall

Outlook: The market is sure the Fed is going to cut the rate at the March meeting

US gov’t debt and currency issues

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• Positive for gold, risk for US market

Market now expects rate cuts in the US to stimulate the US economy

• Market-implied probability of 100% for the Fed to cut rates by 0.5% at the March meeting

Looking at corporates, fundamentals appear to have peaked which could lead to limited upside in equity

Outlook: It’s not all about COVID-19

• COVID-19 development is going to overshadow the impact from the US-China “phase one” trade deal
• Unrest in Hong Kong could worsen as protests seem to resume after a “Corona break”
• Geopolitical tensions between US and Iran remain, the conflict in Syria continues with Turkey and Russia as main players at the moment

Outlook: How much worse can COVID-19 get?

In January, we said:

“If China can’t contain the coronavirus and it spreads to other countries, the global growth outlook could rapidly worsen”

• It’s now evident that COVID-19 couldn’t be contained within China, and we’ve seen equity markets react to that
• We also know that this virus outbreak has hit global GDP growth, the main question is: how much worse can it get?

Outlook: Global pandemic is possible, but not the only risk on the horizon

• Geopolitical tensions and the COVID-19 outbreak are negatives for the global growth outlook and equity
• If COVID-19 becomes a global pandemic, things can become a lot worse
• There’s always a risk of overreacting in times like this, but even if a global pandemic is avoided, there are still geopolitical tensions, peaking fundamentals, and high valuations left to overcome

Outlook: Focus on limiting the downside

• The All Weather Strategy aims to capture as much of the long-term equity return as possible, while also working to reduce the risk of an equity-only portfolio
• As such, we are comfortable to overweight defensive assets; gold and bonds
• Bond prices could be boosted by further rate cuts or larger-than-expected rate cuts
• Gold has historically offered a safe haven in tumultuous times and is uncorrelated to equity over time

Regional Equity FVMR Snapshot

• Fundamentals: US has the highest ROE
• Valuation: Emerging markets and Japan trade at lowest multiples
• Momentum: Massive price drops in the past 2 weeks
• Risk: Lowest gearing in Asia Pacific ex JP and Japan

What you have learned

The Strategy has outperformed World equity in terms of return and at a lower volatility

‒Much due to heavy weights in gold and bonds

Increase our Bonds target weight to 25% and reduce Japan equity to 5%

‒Our primary aim is to limit the downside; therefore, we prefer defensive assets

Andrew Stotz

For more information about A.Stotz All Weather Strategy, please visit https://www.finnomena.com/port/andrew

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