ValidFi News and Articles

It is well recognized that asset allocation is perhaps the most important determining factor for investment return and risk. Tracking professional money managers' asset allocations in a timely fashion is thus of great interests. Moreover, being able to track timely smart pros moves is even better.
Various techniques have been used for this purpose. One of widely followed methods is to track mutual funds monthly money flows. This approach could only give us monthly information, which is not exactly very timely in a fast changing market. A more serious problem with this is that it only could tell us how the investors move money among various assets such as equities, fixed incomes and commodities. It does not really reveal what allocations mutual fund managers are making. Furthermore, this would not give us any information how 'smart' managers are doing.
Some other similar approaches are mostly focused on sentiments. For example, Hulbert Financial Digest has been tracking investment newsletters' bullish/bearish sentiments on equity and gold. Investment newsletters represent a small fraction of the investment opinions. Other well known sentiment indicators include Investors Intelligence's bullish/bearish poll as well as AAII (American Association of Individual Investors) bullish/bearish poll. These indicators offer insights into certain types of investors. They are mostly used as contrarian indicators.
ValidFi recently introduced Pro Money (Asset Allocation) Indicator and Smart Money (Asset Allocation) Indicator. Both indicators track moderate allocation funds' asset exposures US equities and US aggregate bonds. The technique behind these indicators is to derive  timely quantitative asset exposures by directly analyzing a fund's beta exposures for various assets such as US equities and fixed income. The Pro Money Indicator is based on the aggregate asset exposure from majority of US moderate allocation mutual funds (481 funds total). The Smart Money indicator is based on the average exposure among a selected list of top funds. These top funds are selected based on their past risk adjusted returns as well as their consistent performance during market downturns. The indicators are updated weekly.
Using Pro Money and Smart Money Indicators, we create weekly adjusting portfolios separately. The asset allocations of US equities and US bonds (using Vanguard Total Stock Market Index Fund VTSMX and Vanguard Total Bond Index Fund VBMFX as proxies) are derived based on the indicators' allocations. The following table compares these two portfolios and Vanguard Balanced Index Fund VBINX.

	2008	2009	1/1/2008 to 11/5/2009 (Annualized Return)
Smart Money Return	-8.2%	6.48%	-1.23%
Pro Money Return	-19.12%	15.73%	-3.56%
VBINX Return	-22%	14.9%	-5.6%
Smart Money Sharpe	-0.82	0.56	0.7
Pro Money Sharpe	-0.93	0.97	0.8
VBINX Sharpe	-1.05	1	-0.5

From the table, one could see that Pro Money is closely matched to VBINX. This is not surprising as Pro Money is tracking the majority of US balanced funds asset allocation. Arguably, the above table only shows a short history. The model portfolios of strategy Guru Asset Allocation Clone have longer history.  This strategy uses the same technique to arrive at asset allocation decisions. The risk and return of model portfolios like this show the effectiveness of this technique. 
So what are the current Pro and Smart Money allocations? From the following two charts, one could see that the Pro US equity allocation has steadily risen since April until late September.  The Smart Money US equity allocation is somewhat interesting: with a steep rise since July (recall Dow Theory, along with other indicators, gave buy signals during that time), it had a large reduction in early September but immediately increased to around 75%. Also pay special attention to the last week's  (10/26-10/30) allocation changes: instead of reducing the equity allocation along with the general market correction (during the week, VTSMX  dropped 5.6%), the Pro actually slightly increased the equity allocation while Smart Money decreased its equity exposure 9% (from 78.4% to 69.2%)! Call it stubborn bullishness! 

Labels: Portfolio_4406, Strategy_544, VBINX, VBMFX, VTSMX

Recent Barron's article: seeking safe returns in a perilous world revealed PIMCO's  newly introduced global multi-asset fund PGMAX and their asset allocation guidelines: based on risk factor allocation instead of traditional asset pigeonholes.

It is interesting to see that ValidFi's Realtime Asset Allocation tool revealed that PGMAX recently reduced its equity exposure (click to enlarge the chart): 

Labels: BWX, EEM, EFA, IWM, IYR, PGMAX, SPY, Strategy_544, TIP, TLT

Entering October, one saw the markets trembled a little bit. It's time to review several well known asset allocators' positions.
Top performing asset allocation fund Leuthold Core Investment LCORX (19.4% YTD return up to 10/2/2009) made a noticeable reduction in its equity exposure: from almost 100%  to 71%. That is quite significant, even if one takes the recent market drop into consideration. See the following chart:



The other top performing fund Janus Balanced (JABAX) (17.1% YTD return up to 10/2/2009) has been steady after some equity reduction at the end of September: its equity exposure has been around 50%. See the following chart:



Waddell & Reed Asset Strategy Y (WYASX) (17% YTD return up to 10/2/2009) has increased its international equity exposure significantly since early September:



The above is derived from ValidFi's innovative Realtime Asset Allocation (RAA) analysis tool. The actual percentage of allocation might not be that accurate. However, the tool is doing a reasonable job to identify the allocation trend and its change. For the equity exposures mentioned above, we would like to clarify that they represent an estimated Beta correlation with the equity index (represented by Vanguard Total Stock Market Index VTSMX). It does not represent the actual asset allocation but instead  represents how close the asset (equity) portion is related to the stock market index VTSMX. For example, a fund could have a 100% Beta on the equity portion but its actual equity allocation is 70%, that would mean that this fund's equity portion's beta is 1.4  (100%/70%).

The takeaway from the above is that we are in a period of uncertainty. In such a period, it is crucial to be consistent with strategies you are using and position your portfolio accordingly.

Labels: BWX, DBC, EEM, EFA, GLD, IYR, SPY, Strategy_544, TIP, TLT