VanEck and Ned Davis Research Offer a New Approach to Asset Allocation
TOM BUTCHER: Jan, I understand that Van Eck has just partnered with Ned Davis Research to launch a new mutual fund. Can you tell me a bit about it and the rationale behind creating VanEck NDR Managed Allocation Fund (NDRMX)?
JAN VAN ECK: Tom, let's just start with Van Eck's history. What I think we're known for in the investment world is providing the building blocks for portfolios, either through our focused mutual fund strategies or through our specialty ETFs. What we've been thinking about for a long time is how best do we put those pieces together? The available solutions for investors out there are not totally satisfactory to us. There are either solutions that offer a fixed portfolio allocation that does change, regardless of what's happening in the world, or one that changes too much and is overly reliant on technicals. With this new Fund, we have tried to find the sweet spot in the middle, where we provide some downside protection, but also give clients market exposure, which is what they're looking for in the first place.
BUTCHER: How does the Fund provide downside protection?
VAN ECK: We have spent considerable time thinking about the best ways of doing asset allocation, and have identified three major drivers. Number one is macro. Number two is valuation or fundamentals. Three is technical. Macro addresses factors such as economic growth, demographics, money supply. Valuations, or fundamentals, addresses the price-to-earnings ratio. How expensive are stocks? How expensive are bonds? Third are technical indicators, meaning momentum or various other kinds of math. We like the Ned Davis model because it combines all three of these major investment food groups: the macro, the fundamental, and the technical. The macro and fundamental tell us what should be going on in the market, giving it theory, but those “shoulds” can be bad in terms of timing. For example, if you consider the housing crisis, or the bubble in NASDAQ stocks, or the bubble in the Japanese stock market several decades ago, these events extended for long periods of time. Basing investment decisions on the timing of these events was difficult, because it was hard to say when the overvaluation would stop. That is when the technicals come in.
BUTCHER: You are discussing an allocation across stocks, bonds, and cash?
VAN ECK: Right. The only true risk-off investment is cash. So I like to call it 60-40-0, because there's really no asset class like cash to protect you in terms of a crisis because, it is entirely possible that stocks and bonds could both going down at the same time. Cash is the most certain vehicle in the short term to maintain your purchasing power.
BUTCHER: Going back to asset allocation, why is it so important for investors to get it right?
VAN ECK: I think the biggest concern investors have today is risk management. Many investors still have the 2008 - 2009 global financial crisis weighing on their minds. They may have lost 30% or more in their 401(k), and they just don't want to repeat that experience. The concern for investors is that if 99% of mutual funds are designed to be fully invested at all times, you need to have some kind of risk overlay. There are already different kinds of tactical overlays. Our new Fund is one potential solution. It is designed to cover an investor’s core portfolio, so it does not include specialty asset classes. It focuses on mainstream U.S. stocks, international stocks, and U.S. bonds, and how to allocate to those asset classes over time. We think that is addresses the main concern of risk protection, and helps investors avoid the depth of downturns, while still keeping them invested in the market.
BUTCHER: I suppose one of the really important things about such a strategy is flexibility, so that you can change indicators if it is not appropriate in a given environment.
VAN ECK: Learning happens all the time, and we have a team here at Van Eck that is studying these ongoing issues. Ned Davis' full research group of 40-plus people is also conducting research every day into the markets, making sure they are capturing everything, testing their models, adding new models. The process is absolutely ongoing, as it should be.
BUTCHER: Finally, do you see this new fund with Ned Davis Research as a natural evolution in VanEck's business?
VAN ECK: I think it's what investors are looking for today, and it combines elements of the things that we've done for our 60-year history. We are trying to capture the sweet spot that gives investors for investors the confidence to allocate to the stock and bond markets, which have attractive returns in the long term, and also understand that someone is overseeing that allocation for periods of downside volatility and risk. The investment process is put together by two firms that have been around for multiple decades, and so they can participate in the market with a risk overlay and with experienced investment managers who are looking out for the downside every day.
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