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October 02, 2019Navigate Market Storms with a Guided Allocation (5:32)
David Schassler
David Schassler
Portfolio Manager and Head of Quantitative Investment Solutions
VanEck’s Guided Allocation suite shares a tactical, objective philosophy aimed at preserving wealth through challenging markets. Portfolio Manager David Schassler discusses how the indicators help to identify, measure and respond to risks impacting equity and fixed income markets.

David Schassler: The VanEck suite of Guided Allocation funds are designed to identify risk in key markets, and when you find those risks, to de-risk. More specifically, what we're doing is, we're using objective data-driven indicators that are really, they're designed to sniff out risk. The reason why they're objective and data-driven is because when you're completely objective and data-driven, you're able to remove emotion from the process, and that's a key part of what we're doing.

Each fund de-risks in a different way. Some of these strategies will go from fully invested to a cash position, which would be mostly Treasuries. It really depends on the asset, how we're going to de-risk. But the point is, objective data-driven indicators remove the emotion from the process when there's a lot of risk in the markets that we're actually trying to measure that we're investing in. It will de-risk in whatever form is the most appropriate for each asset.

What are the macro risks impacting the equity and fixed income markets?

Let's talk about the macro risks that we're seeing in the market now vis-à-vis the indicators across the different funds that we have. There's risks that we can easily measure, economic activities slowing. We've been seeing that since the beginning of 2018. Earnings growth is slowing as well. Those are clear risks that we can measure and inject right into the portfolios. We've been seeing that for some time.

There's also a lot of other market risks that are out there that are driving the markets, but they're harder to measure: trade wars with China, federal monetary policy, Brexit. These are risks that are harder to model independently, but we can do that vis-à-vis price. If you look at the price of the market, the price speaks very loudly sometimes. We're seeing that through higher volatility within the equity markets as well as the fixed income markets. We're seeing that stock prices are actually having a hard time trying to outperform bond prices over intermediate and longer-term periods. So that's a warning sign. You take a lot more risks as an equity investor, so when you don't get compensated for that risk, that's a problem, and that's what we're seeing as well. It's really effectively the macroeconomic fundamental landscape being weak, and then being verified by the technical landscape.

The fixed income market, just like the equity market is showing a lot of volatility. One of the key metrics that we look at is the 10-year. If you look at the U.S. Treasury note, the 10-year, you see a lot of volatility there. The U.S. Treasury note, the 10 year, is a key barometer of risk because it's used as market sentiment. When the market anticipates a recession or there's a higher likelihood of recession than before, it typically drives rates down because it's really getting out in front of monetary policy. When there's a period of weakness, typically central banks lower interest rates to fight that off. When they do that, they lower rates. Now what we're seeing is that Treasury yields, the volatility is going crazy because rates have gone lower recently. That's a concern.

What areas within have been responding to elevated risks?

Real assets have had two bright spots. The first bright spot is gold. Gold has been one of the best performing assets, full stop. Gold is up because there's a lot of tensions in the world right now. Risk on scenarios, not good for gold. Risk off scenarios, when the world's kind of imploding. Not saying that that's happening right now, but a higher risk regime? That's good for gold. Lower interest rates, good for gold, because gold doesn't have a natural carry. Gold doesn't have an interest rate. You don't earn something when you sit in gold. When interest rates are lower and risk is higher, that's a good regime for gold. That's exactly what we've had, and that's why gold has outperformed.

The second top performing real asset segment has been higher yielding assets, also benefiting from lower interest rates. We're in a yield-starved environment globally, so investors are flocking to assets with higher yields, and that's benefiting certain real assets that especially … think about REITs, think about infrastructure, assets that have higher yields are getting a lot of the dollars that were previously elsewhere.

What funds are included in the Guided Allocation suite?

Let's talk about the specific funds. There are four funds within this category of funds at VanEck. The first is a partnership with Ned Davis Research. It's the VanEck NDR Managed Allocation Fund, which is a global tactical asset allocation fund designed to help investors determine when to be invested in stocks, bonds, or cash.

The next, also a partnership with Ned Davis Research, is the VanEck NDR CMG Long Flat Equity ETF. The ticker is LFEQ. You could think about that as the S&P 500® with guardrails. It uses technical readings to figure out when risk is high or when risk is not high in the S&P 500.

The next offering we have is the VanEck Real Asset Allocation ETF, that ticker is RAAX, R-A-A-X. What this is, is a diversified real asset allocation ETF. It gives you exposure to REITs, infrastructure, MLPs, commodities, natural resource equities. A truly diversified real asset allocation offering, but it does it with embedded risk management.

The last one is the VanEck Municipal Allocation ETF. The ticker is M-A-A-X, MAAX. What this does, it helps investors allocate across municipal ETFs that have different duration, as well as credit risks. How much credit risk do you want to take now? How much duration risk do you want to take now? That's the whole suite of Guided Allocation funds.

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