January 2015 Investor Letter

Model Portfolio Update

Executive Summary

Despite being defensively positioned for much of the year, the Active Asset Allocator delivered a strong performance in 2014, +15.6%, outperforming the average multi-asset fund by +3.1%. Buy-and-hold equity investors have been spoiled in recent years as all news has been treated favourably. That trend is about to change and many will be caught wrong-footed. We anticipate another strong year for the Active Asset Allocator in 2015 as we navigate what we expect will be increasingly turbulent waters.

The Active Asset Allocator is defensively positioned today 20% equities / 50% bonds* / 30% gold. (Bonds now include euro government, corporate, inflation linked and absolute return bonds). We increased the allocation to gold in December 2014 from 20% to 30% and gold has since rallied +9% in euro terms.  

Equity Market Update

Is history about to repeat? January 2015 has started out in quite a volatile fashion with government bond yields falling (and bond prices rising), crude oil prices tumbling, high yield bonds topping out and the US dollar rallying sharply. The same trends occurred in 2008 before the stock market fell out of bed. 

In our December 2014 Investor Letter, we began with a 6 month chart of the S&P 500, questioning the sustainability of the recent break out to new all time highs, given the many risks that we see on the horizon. Our cautious stance has so far been proven correct. Shortly after breaking out to new 52-week highs, the S&P 500 rolled over and plunged -10%. We then witnessed a sharp bounce in what we noted at the time had all the hallmarks of a short-covering rally, followed by more selling in the first week of January 2015, which is where we find ourselves today. Heightened stock market volatility will be a prevailing theme this year. Be prepared.


Last month, we also discussed the plunging price of crude oil, which we expect will drive many financial trends all over the world in 2015. We highlighted the strong positive correlation between European equities and Brent crude and noted that crude oil was either about to have a snap back rally (unlikely) or European equities were in trouble. Let's take a look at the updated chart today.


In a little over a month, Brent crude has fallen another -30% or $21/barrel, while the German Dax Index has dropped -5% or almost 500 points. This divergence has a long way to run before it resolves itself either by crude oil rallying sharply or European equities entering a bear market. For now, we continue to be positioned defensively in the Active Asset Allocator.

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

Bond Market Update

Following the strong performance by government bonds in 2014, we have begun to shorten the duration of the bonds we hold in the Active Asset Allocator, making the portfolio less sensitive to changes in interest rates. We also started to increase the allocation to inflation-linked bonds and corporate bonds. We will likely keep the allocation to corporate bonds relatively low as they are positively correlated to risk assets. 

Government bond yields around the world continue to decline and credit spreads (the difference between risky high yield bonds and lower risk government bonds) continue to widen. We witnessed the same phenomenon in early 2008 as investors started pricing in the increased global macro risks at that time. The credit spread ratio on the chart below has not yet reached 2011 or 2008 levels, but it is still rising and the slope is getting steeper. We are watching this chart closely, particularly now that the down-sloping trend line from 2009 - 2014 has been broken.


High yield bonds have not confirmed the recent highs in the S&P 500, which is another red flag we are monitoring closely for now. Should equities and junk bonds rally to new highs together, we will move back to a more constructive asset allocation, but for now, continued caution is warranted in our view.


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

Gold Market Update

Gold has historically performed best during periods of US dollar weakness relative to other currencies. What we can see clearly in the following chart is that since 2011, gold has struggled while the USD Index (faded blue line), a proxy for the US dollar, has rallied sharply. Gold got ahead of itself in 2011 and too many bulls crowded the long side of the precious metals market. Those late to the party have now been well and truly shaken out of their positions. Sentiment has reached a negative extreme and it is our view that the three year bear market in gold may have ended in December 2014.

Look closely at the chart below. You will see that the US dollar has rocketed higher over the last few months but gold has refused to decline. This is quite a change in behaviour for the precious metal and a clear signal that the gold bull may be about to return. We recently increased the allocation to gold in the Active Asset Allocator from 20% to 30% to capture what we expect will be rising gold prices in the months ahead.


When gold recaptures the longer-term 20 month moving average, we will become more confident that the gold bull market is back. Capital should come flooding back into the precious metals sector when the trend higher resumes.


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