- The tilt to growth across all equity size categories (Large, Mid, Small) was cut in half (~15% to ~7%). The technical and valuation factors signaled a move from growth into core positions after Growth has outperformed Core by more than 15% YTD.
- Cash was decreased with an increase in allocations to Bonds. This also resulted in a small decrease (5%) in allocation to Equity.
- Municipal Bond exposure was introduced, diversifying the Bond allocation further.
Summit Alliance Capital Management LLC, a Dallas Texas money manager with more than $800M in assets under management, is offering Scientific Advisors’ asset allocation model portfolios through their network of brokers, registered investment advisors and wealth managers.
“This gives us a presence in the rapidly growing asset management business in the South. We look forward to providing Summit Alliance with institutional quality portfolio management through our Dynamic Asset Allocation products.” founder and CIO Stephen Harrington explained.
For more information about Summit Alliance Capital Management visit their website at sa-cm.com.
We are pleased to announce that Cedar Rock Investment Advisors, a fast growing Registered Investment Adviser, has chosen Scientific Advisors’ suite of asset allocation investment products to offer to their clients.
Catherine Ryan, CFA of Cedar Rock is a Registered Investment Advisor with over 10 years of experience as a professional money manager. She has earned the right to use the Chartered Financial Analyst (CFA) designation and appreciates the emphasis the ICFA places on ethics and professionalism. Integrity is the hallmark of the Cedar Rock enterprise.
For more information on Cedar Rock Investment Advisors, contact: Catherine Ryan (Catherine.Ryan@CedarRockInvestments.com) or visit their website at cedarrockinvestments.com.
Recent Dynamic Allocation Changes
Examples of three asset allocation changes in the past two years in growth portfolios:
- EEM (emerging markets)
We had an allocation of 8% for EEM (emerging markets) from 2006 going into 2008. By the beginning of May, 2008, our technical and fundamental indicators signaled an allocation change. On May 10, we cut the allocation in half, to 4% and another 25%, to 3%, by July, 2008, increasing our cash allocation by 5%. We remained at this underweight allocation until March 9, 2009, when we increased the EEM allocation to 5% as part of our rotation out of cash and back into the equity and bond markets.
- SPHIX (junk bonds):
From inception until March, 2007, we had an allocation of 5% to High Yield (SPHIX). Technical indicators and changes in the interest rate environment signaled an allocation change. In March, 2007; we cut the allocation in half, dropping the High Yield allocation to 2.5%. By July, 2007 we had completely sold out of Junk Bonds, one of the few times we decreased exposure to an asset class to zero. We held the allocation at zero until March of 2009, when we went back into High Yield with a 2.5% allocation.
Starting in May of 2008, and going until January, 2009 we sold off investments in emerging markets, international equities, domestic equities and fixed income and increased our cash allocation. Starting at 5%, we raised the allocation to 10% by May, 2008, 15% July, 2008, 20% December, 2008 and 25% January, 2009. We decreased our cash allocation to 8% in March, 2009.
We have made allocation changes to our model portfolios, reducing exposure to equities and increasing exposure to cash for the near term. Given the historic, day to day changes in volatility, take extreme care in implementing these recommendations. Once volatility has decreased, we will be incorporating additional portfolio changes to reflect the new environment going forward.
All allocation changes will be reflected to registered users of the site with a lag, only clients will have access to the most up to date asset allocations. Contact us today to sign up for these important changes and to get the latest advice on a timely basis.
Given the recent market sell-off, clients are going to be nervous. My response to clients below.
- This is not Sept of 2008 when Lehman, etc imploded.
- This may only be the long awaited correction, with an improving economy.
- We are proactively protecting the portfolios, model raised cash in conservative+ growth portfolios on 1/11
- We are dynamic, we sold Gold (GLD) and Int Bonds (WIP) on 1/8 (see attached), not bad timing for a strategic shift!
- We use alternatives to get returns and protect portfolio; we bought MERFX on 1/19
- High volatility makes timing tricky, these portfolios are not designed for timing opportunities.
- Discuss long/short products.
Market outlook for the next 6-12 months.
2010 will be a difficult year in all asset classes, with the market grinding slowly higher with a great deal of volatility. We believe that a mix of stocks, bonds and cash are expected to produce the best returns. The current market is not unlike June-July 2009, when the AA products were still long equities. The lasting impact of the problems in Spain and Greece (two of the so called PIGS) will be dollar strength. We expect this outlook to hold until monetary policy changes (e.g. discount rate changes) or a systemic event on the order of Sept 2008 (e.g. Lehman failure).
Allocation changes effective immediately
- the opportunity set has been opened up for all asset levels; this means you will see allocations to CVSIX and MERFX for the smaller accounts.
- the allocations assume no constraints, such as individual stocks held in client account, to the cash buffers that seem to exist in some of the other accounts.
- we eliminated the exposure to Gold across all portfolios as our inflation/deflation hedge had run its course.
- As well, we decreased dollar weakness exposure in the portfolio, decreasing exposure to foreign fixed income securities.
- We added exposure (5%) to Equities and decreased exposure to Fixed Income by a similar amount adding small cap value exposure.
Please, find attached, the new model allocations for the Scientific Advisors, LLC asset allocation models.
- The growth tilt has been removed
- equities have been pared back to neutral weight
- international and emerging weights have increased
- bond quality has been increased
- The Inflation/Deflation tilt remains the same
- and we have increased our exposure to world wide bonds
The model portfolios have had strong performance, returning between 11% and 14%, through June 30, 2009 outperforming all other similar asset allocation funds.
Our tilt to Growth across all equity classes has contributed to the relative outperformance in the second quarter. We expect that the tilt to Growth will be decreased in the third quarter as the cash flows into the equity markets slow and forward earnings expectations become fairly priced.
In addition, the inflation/deflation tilt has performed well year-to-date, with the gold allocation returning more than 5% and the inflation-protected treasuries returning almost 4%. We don’t foresee any changes to the inflation/deflation tilt over the next few quarters.
The investment environment looks to be difficult going into the third and fourth quarters, with returns to traditional equity and fixed income classes below historic norms. We continue to monitor the linkages between asset classes to identify a possible return to the lows experienced in the first quarter.
On May 9th, 2008 we cut our exposure in Emerging markets (EEM) by 50% across all risk groups (i.e. conservative to aggressive).
Three model factors had turned negative; rising inflation in the BRICs, credit spreads (EEM performance inversely correlated) and oversold (dollar)/overbought (commodties) conditions.
In addition to this, we now have momentum working against EEM.
Generally, these factors have a time horizon of 1-2 years and we are only about 3-6 months into the cycle.