December 2015 Investor Letter

Active Asset Allocator Performance

Investment Philosophy and Approach

The Active Asset Allocator investment strategy is designed to deliver a consistent level of positive returns over time with a strong focus on capital preservation. We follow a multi-asset investment approach, actively allocating between global equities, bonds, precious metals, currencies and cash. We always invest with the primary trend of the market and do not follow a benchmark. Instead, we manage the market risk for our clients. Our strategy has returned 12% per annum net of fees since inception with a lower level of risk than the average multi-asset fund. Our active asset allocation approach is best illustrated in the following chart.

AAA Asset Allocation.jpg

Executive Summary

For the first time since 2010, the Active Asset Allocator has run a full calendar year without a single change to the asset mix. While not unprecedented, this is quite unusual and testament to the difficult trading conditions experienced this year. In 2015, regional stock markets were a mixed bag with the US -3%, Europe +4% and emerging markets -10% on average. Despite euro gold delivering a flat performance and EU government bonds +2%, the Active Asset Allocator is on track to deliver another positive year for investors; not quite 12% but positive nonetheless. I expect 2016 to be filled with opportunity for those of a patient persuasion. Until then, Happy New Year to one and all and my sincerest thanks for your continued support.

Stock Market Update

US stocks returned -3% on average in 2015, though the performance varied widely by sector. Large cap technology stocks for example returned +9%, while industrial company shares declined -2%. Stocks in the transportation sector sunk -18%, despite a -31% collapse in crude oil prices. Euro investors can add +10% to these returns due to the fall in the Euro versus the US dollar in 2015.


Despite pockets of strength in US stocks, I remain concerned about the broader outlook based on valuation and the deteriorating technical picture I see. Over the last 20 years, the S&P 500 has broken below its long-term 100 week moving average (100 WMA) on just four occasions. In 2000 and 2008, stock prices collapsed shortly thereafter. In 2011, after a battle, stocks recovered the 100WMA and went on to rally another +70%. In 2015, the S&P 500 has once again broken below the 100WMA and the battle is on. The 100WMA currently stands at 2,006 so a meaningful close below that level could spell trouble. This bull market in stocks is almost 7 years old now and approaching the second longest bull market in history (average: 3.8 years, median 3.6 years). Bull markets typically don't die of old age, but at the same time, they all must eventually end. 2016 is shaping up to be quite an interesting year.

Last month, I reviewed the chart of the Value Line Geometric Index, noting the deteriorating technical picture. Over the past five weeks, there has been no real improvement. This equally weighted index of 1,700 stocks is signalling that the US economy is at the very least, slowing down.


The same pattern is evident in the FTSE All World Index, my global stock market barometer. While some regions have performed well this year, particularly in Europe, due to the weaker currency (Eurostoxx 600 +7%, Germany +9%, France +9%, Italy +13%, Denmark +34%, Ireland +39%), in aggregate, the trend in the Index is down. Many Asian and Latin American stock markets have declined over -10% in 2015.


So, I remain cautious heading into the new year. This stock bull market is ageing and stock valuations are high relative to history. US corporate profits have peaked for this cycle. Margin debt has also peaked and is now in decline. Meanwhile, the Federal Reserve has no real room to cut interest rates to cushion the fall if stock markets roll over. Interesting times indeed.

For more information on our stock market analysis, please get in touch. You can reach Brian Delaney at or 086 821 5911.

Bond Market Update

bond yields.jpg

There is little to report in fixed income this month. Government bond yields have risen by 10-20 basis points in Germany and by 10 basis points in the United States, but only at the shorter end of the yield curve. This is in response to the Federal Reserve increasing short-term rates by 25 basis points earlier this month. While the Fed controls the short end of the yield curve in the US, the market determines long-term bond yields. Long-term bond yields have hardly budged in the US over the last month, increasing by just 3 basis points. 30-year yields have rallied by 10 bps in the UK and 20 bps in Germany since our last report and have actually fallen 11 bps in Japan over the same period.

The main story continues to be the slow motion deterioration in the high yield/junk bond market. Investors reaching for yield have invested in high yielding fixed income instruments including credit derivatives and below-investment grade bonds. The JNK ETF has already declined -11% from its recent peak compared to just -2% for the S&P 500. Much pain ahead for high yield investors.


For more information on our bond market analysis, please get in touch. You can reach Brian Delaney at or 086 821 5911.

Gold Market Update

Gold started the year at €978 ($1,183) and is priced today at €976 ($1,062), so despite all the hoopla and bearish calls, euro gold has returned -0.2% in 2015. Gold is of course a core component of the Active Asset Allocator and a zero return hasn't helped much this year but gold will rally in its own good time and when the bull market resumes, the Active Asset Allocator will be ready. The patience of a saint is however required in the meantime. After a four year bear market, I think the wait is almost over.


What could be the spark that reignites the gold bull market? US dollar bulls today are ten-a-penny. Being bullish the USD is very much a consensus trade, particularly since the Federal Reserve has started to raise interest rates, while the ECB continues to talk the euro lower. However, all of this information is already in the price. Long USD and  long US equities are very much the same crowded trade and both may be about to reverse.


Looking back through history, the USD Index declined sharply in the lead up to the 1987 stock market crash. The USD Index fell sharply during the 2001/2 technology bust and again during the 2008 financial crisis.  It would surprise an awful lot of folks if the USD turned lower in 2016 in  tandem with a declining US stock market. This does not have to happen for gold to rise but it may drive new demand into precious metals by US investors if a protracted decline in the USD takes hold.

For more information on our gold market analysis, please contact Brian Delaney at 086 821 5911 or