Global Asset Allocation Strategy: October Model Update

Global Asset Allocation Strategy: October Model Update

 

Each month, I publish an update for my hypothetical global asset allocation model. The purpose of this model is to provide a strategy that is both timing based and relative strength based.

Additionally, by tracking this model, we can get a better idea of how global investors are allocating their portfolios – which can be useful during times of geopolitical and/or market flux.

For those not familiar with my global asset allocation strategy, please click here to read an overview.

Year To Date Performance

Year to date, the model has pulled back during the month of September. This is most likely due to increasing market volatility from a rising US dollar.

2014-10-01_1121

source: ETFreplay 

Last Month’s Allocation

Last month we saw some profit taking within the model as global investors started to worry that the US Fed was going to be taking a more aggressive stance towards interest rates.

During this time we also saw a strengthening in the US dollar, which had an impact on global markets as well.

As a result of this, highly leveraged investors began to take profits from their portfolios and move to cash.

global relative strength model

“EWA”, the iShares MSCI Australia Index fund had the largest decline within the portfolio last month. In addition to a stronger dollar, EWA faced increased volatility surrounding its national elections.

global map

 source: Riverbend Investment Management 

Top Global Relative Strength ETFs For October

This month’s global model has some interesting allocations.

The increasing volatility of the global markets has triggered a move to US bonds within the model. Part of the risk management philosophy of this model, is that if the strongest (as measured by relative strength) ETFs fall below their respected 10 month moving average, then they are to be replaced by US Treasuries – or in this case, “TLT” (iShares Barclays 20+ Yr Treasury Bond ETF).

Top ETFs In Model By Relative Strength

SYMBOLNAMEALLOCATION
EWJiShares MSCI Japan ETF10%
EWSiShares MSCI Singapore Index Fund10%
EWWiShares MSCI Mexico Inv. Mt. Idx.10%
QQQPowerShares QQQ Trust10%
SPYSPDR S&P 500 ETF Trust10%
TLTiShares Barclays 20+ Yr Treas.Bond50%

Does this mean that there is a flight of global assets moving into US Treasuries due to fear in the markets?

Not necessarily,

Looking at backtested data for this model, during times when the model is overweight US Treasuries – but still includes the higher beta QQQ ETF – the global markets tend to become much more volatile.

Investors “fear” is heightened (due to geo-political fears, economic fears, or fears of a strengthening US dollar) leading some to move to cash or US Treasuries, while others look for opportunity during pullbacks in the market – leading to higher overall levels of market volatility.

This fear may or may not be an early warning sign. Remember, markets like to climb a “wall of worry”.

From Investopedia:

While a “wall of worry” may sometimes consist of a single economic, political or geopolitical issue significant enough to affect consumer and investor sentiment, it more commonly comprises concerns on numerous fronts. The markets’ ability to climb a wall of worry reflects investor confidence that these issues will be resolved at some point.

I should note that In the past, when this model does shift to 100% US treasuries, we have seen major declines in the market.

Typically, however, this model will shift quickly from a portfolio of all equity ETFs to US Treasuries before a major market decline, rather than a slow change in allocation like what we are seeing now.

Going forward we should keep a close eye on market trends and how the global market performs in October. This might just be a bump in the road, or the start of something larger.

—-Backtested data provided by ETFreplay—-

Questions? Thoughts?

john_rotheFeel free to leave a comment below or you can reach out to me privately here.

– John

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