Astoria Portfolio Advisors outlined our pro-growth, cyclical bias in our July and August Macro Insights.
We remain constructive given (1) earnings globally remain upward trajectory (2) financial conditions remain very loose (3) realized inflation remains subdued (4) central banks remain accommodative.
In this month’s Macro Insights, we discuss the solutions and characteristics of our Multi Asset Risk Allocation Model Portfolio.
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Astoria Portfolio Advisors' Macro Insights
- Astoria Portfolio Advisors (“Astoria”) outlined our pro-growth, cyclical bias in our July and August Macro Insights (read here and here). We remain constructive given (1) earnings globally remain in an upward trajectory (2) financial conditions remain very loose (3) realized inflation remains subdued (4) central banks remain accommodative.
- The combination of the above mentioned factors is driving levered growth complexes like Emerging Market Equities and International Small Caps which are up 25-30%
- We have repeatedly been asked what would cause us to reduce our cyclical bias. Of the 50+ indicators and models that we monitor, there are several that would ignite risk reduction:
- (1) aggressive Fed tightening
- (2) an inverted yield curve
- (3) significantly tighter financial conditions
- (4) deterioration in the global earnings cycle
- In this month’s Macro Insights we discuss the solutions and characteristics of our Multi Asset Risk Allocation Model Portfolio.
Astoria’s has Been OW International Equities Since Last Year Which is a Key Driver Behind this Year’s Outperformance
- For our Emerging Market Equities we are utilizing IEMG (all cap EM) and EPI (India). IEMG includes EM Small Cap stocks which have a lower beta and lower volatility compared to EM Large Caps which makes it valuable from a portfolio construction standpoint.
- We previously highlighted why we like India (read here).
- For our Developed Markets ex-US Large Cap exposures, Astoria owns ACWX (DM ex-US unhedged), DBEF (MSCI EAFE), HEDJ (Europe hedged), DXJ (Japan hedged), & JHDG (Japan unhedged).
International Small Caps Have Important Portfolio Diversification Benefits
- How many research reports do you read on International Small Caps? Get our point?
- In an environment of increased global growth, muted inflation, and an upswing in the global earnings cycle, International Small Caps are attractive.
- Compared to Large Caps, International Small Caps have
- (1) lower correlations
- (2) are pure plays on local economies around the world
- (3) have varying factor and sector exposures
- (4) have important diversification benefits within a global equity portfolio
- In August we added
- DFE (European Small Caps unhedged)
- EWX (EM Small Caps unhedged)
- SCHC (DM ex US Small Cap unhedged)
- SCZ (MSCI EAFE Small Caps unhedged)
Gold Has Done Well Despite this Summer's Flatten in Real Yields
- US ETFs: We are significantly UW the US. We own VTI which is a play on the smaller cap, value bias in the marketplace.
- We added SCHA (US Small Caps) as the disconnect between Small Caps and the broader market got too stretched.
- We are also utilizing KBWB (US Banks) given our constructive view on US Large Cap banks.
- Was Risk too Low? This summer we noticed several strange occurrences (1) EEM realized volatility fell below NASDAQ volatility (2) VIX traded below 10 (3) SPX 30 day realized volatility reached 5. Complacency was rampant which made us a bit uncomfortable.
- We felt it was prudent to implement hedges (that carry well) ahead of what has been historically a rough period for equities.
- Gold: We increased our Gold exposure (IAU & SGOL) and cash (the only true uncorrelated asset) in mid August. We also added ZROZ (Zero Coupon bonds) and TLT (Long Dated US Treasuries) to further soften the portfolio’s volatility.
- These hedges were implemented on a short term tactical basis.
We Value Income Strategies as They Help Reduce our Portfolio Risk
- Astoria’s Multi Asset Risk Allocation portfolio contains an income sleeve. The total current dividend yield for our model is 2.95%.
- Can there by any value in Fixed Income after seeing $2 trillion of inflows since 2007? It’s not easy to find value and there are bubbles throughout the asset class. However, we would note the following:
- When factoring in the yield relative to the risk you are taking, Preferreds are attractive. PFF yields 67% and the median 30 day realized volatility over the past 5 years is 4.5%.
- PFF also fits our constructive view on US Large Cap banks which make up 40% of the PFF yields 5.6% and 33% of the bonds are rated AAA. Duration = 3.6.
- We recently wrote an article on PFF via ETF.com (click here).
- EMB, HYD, BKLN/SRLN, and AMLP are other substantive income strategies in our model.