POST-MPT GROWTH ALLOCATION UPDATE
Posted on: 07/17/2015
Over the past three months, iSectors’ Post-MPT Growth Allocation has gone through some significant changes. The strategy is currently incorporating its lowest amount of leverage since October 2013—after tracking close to its 33% maximum for over a year. The model is still moderately positive and indicates that US equities is still an attractive class.
In addition, the Allocation’s investments in US Treasury Bonds stand at its highest level since January 2013. Since the strategy’s benchmark is the Standard & Poor’s 500, the model is indicating the Treasury Bonds could outperform equities, especially if stocks turn lower. The Allocation’s overweight to technology has also risen while retaining its overweight to Finance and Health Care and underweight to Basic Materials, Energy, Real Estate (recently reduced from overweight) and Gold Mining.
It should be noted that the quantitative algorithm behind the Post-MPT Growth Allocation is totally objective and strives to predict expected returns for nine low correlated asset classes. The expected returns are determined by assessing the changes in over a dozen economic and capital market factors. Then the algorithm creates an optimized portfolio with the goal of producing the highest possible returns that have the lowest chance of market value declines. So the proper way to interpret the algorithm’s current output is:
- The algorithm is moderately bullish and that we could see new highs this year;
- The risk for a correction has increased significantly. As of 7/7/15, the Standard & Poor’s 500 is only 4% off its all-time high. It could drop further if second quarter earnings announcement disappoint and foreign troubles negatively impact economic demand;
- If stocks go into a correction, US Treasury bonds, at recent highs in yield, will be purchased by investors. The Federal Reserve will postpone their first increase until December at the earliest. We believe that at year-end 2016, the Federal Funds rate will stand no higher than 0.50%. If this is the case, interest rates will decline and bond prices will rise;
- The Allocation is overweighting sectors with earnings visibility. It is underweighting sectors that are sensitive to economic strength or inflationary pressures.
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