February 2015 Investor Letter

Model Portfolio Update

Executive Summary

The Active Asset Allocator was handsomely rewarded with an overweight position in bonds in 2014. This year, we are diversifying into corporate and inflation linked bonds while we wait for a compelling entry point into the stock market. In the meantime, our overweight gold position is working well. Our overweight position in equities worked in 2012 and 1H2013 and our overweight position in bonds worked in 2014. Gold is shaping up to be the trade of the year in 2015 and we fully intend to participate. Why don't you join us? We are not fussy where the returns come from, only that they do come in some form.

Equity Market Update

We start this month's update with a recap of the current positioning of the Active Asset Allocator investment strategy. As a reminder, the Active Asset Allocator invests in a mix of global equities, bonds and precious metals, the allocation of which is actively managed and determined by each market's primary trend. One of our tools, the technical trend indicator, delivered a 'sell' signal in October 2014 and has remained in defensive mode ever since. As a result, the Active Asset Allocator remains defensively positioned today with an allocation of 20% global equities / 30% bonds / 30% gold / 20% cash.

 
 

While European stock markets have started 2015 on a firm footing, US equities have traded in a weaker fashion, chopping sideways in the first six weeks of the year. US equities now account for 57% of the typical investment manager global equity benchmark and this is why we focus so much of our time and research on this region. A break below support will have us sitting tight in defensive mode and focusing on a low risk place to rebuild our equity exposure. If we get a sustained break in the S&P 500 above resistance and out to new all time highs, we will increase our equity allocation, despite current expensive equity valuations. If we increase our equity exposure, we will have a clearly defined exit strategy in place in the event that the market turns lower later in the year.

 
 

We have come a very long way from the March 2009 stock market lows - over 200% in fact if the S&P 500 is your benchmark. In that time, the VIX (FEAR) Index, a key measure of stock market volatility (blue dotted line below) has returned to pre-crisis lows, falling from a crisis peak of almost 80 in 2008 back to 12 in December 2014, an -85% drop. The Vix Index rises on fear and falls on greed. It reached multi-decade lows in December 2014. However, in the first six weeks of 2015, we have seen a +45% jump in the Vix, our stock market volatility barometer, from 12 to 17.5. Investor complacency has given way to a small degree of investor angst. It is too early to tell just yet if this is an emerging trend, but our interest is piqued.

 
 

This next chart should give the equity market bulls something to think about. Here we see real NYSE margin debt growth - basically investors borrowing to invest in the stock market - at a new all time high, above both prior peaks in 2000 and 2007. Amazing. If/when margin debt peaks and starts to turn lower, the stock market will be in trouble. Margin debt growth may have peaked in February 2014. We will have to wait and see. 

 
 

Let's end the equity market update on a positive note. Healthy bull markets require a majority of stocks to participate in the uptrend. The Advance/Decline Line - a key input into our Technical Trend Indicator - captures this trend and so far, the trend continues in a bullish fashion. The A/D Line hit a new all time high just last week, tipping the scales once again in favour of the bulls. Other inputs into our trend indicator are more cautious but the A/D Line is signalling that new highs lie ahead. 

Typically, the A/D Line tops out weeks or months before the stock market as you can see in the following chart. We wait patiently for the market's next signal.

For more information on our analysis, please get in touch. You can reach Brian Delaney at brian.delaney@secureinvest.ie or 086 821 5911.

Bond Market Update

US real GDP has grown by 2.2% per annum for the past four years, accelerating to over 4.0% in the last six months, with no real sign of inflation or deflation. US 30 year treasuries are currently yielding 2.6%. In the Eurozone, real GDP growth has grown by +0.3% pa over the same period, nudging higher to +0.4% in recent months, while deflation remains the prevailing threat. German 30 year bunds currently yield 0.9%. Neither bond market offers compelling value, while both appear to be discounting a slower growth and/or recessionary environment in the not-too-distant future. However, capital has been treated well in the fixed income markets and as long as that trend continues, the bond bull market won't die.

The Active Asset Allocator currently holds a 30% allocation to Eurozone government bonds (1.3% yield, 10 year duration), a 5% allocation to Euro aggregate bonds (0.7% yield, 6 year duration) and a 5% allocation to Euro inflation-linked bonds.

The Active Asset Allocator was handsomely rewarded in 2014 with an overweight position in Eurozone government bonds. This year, we are diversifying into corporate and inflation linked bonds, while we wait for a compelling entry point into the stock market. In the meantime, we continue to benefit from our overweight position in gold. Our overweight position in equities worked well in 2012 and 1H2013; our overweight position in bonds worked well in 2014; our overweight position in gold is working well so far in 2015. We are not fussy where the returns come from, only that they do come in some form!

For more information on our bond market analysis, please contact Brian Delaney at 086 821 5911 or brian.delaney@secureinvest.ie.

Gold Market Update

We increased the allocation to gold in the Active Asset Allocator from 20% to 30% in December 2014. Shortly afterwards gold took off, rallying +20% in euro terms before giving some of that back in the last week. We will likely cut back the allocation to precious metals in the Active Asset Allocator shortly and wait patiently for the next safe entry point, likely to come in April or May. Gold is gearing up to potentially be the trade of the year for 2015 and we fully anticipate being on board along with our clients. For any prospects reading this evening, please do get in touch and we can show you how to implement the Active Asset Allocator in a very cost effective way.

 
 

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or brian.delaney@secureinvest.ie.