August 2015 has been a particularly volatile month for the global financial markets, which may cause some investors to feel uneasy or fear that something much larger is perhaps beginning to occur. The selling appears to be driven by concerns over China’s economic slowdown and largely unexpected currency devaluation, in addition to oil’s continued slide to levels not seen in six years. The biggest source of uneasiness right now appears to be China’s economy. The country surprised the world last week by announcing changes in the way it manages its currency, the Renminbi, which led to the currency falling in value against the dollar.
Worthy of consideration, however, is that volatility is a factor of investor sentiment, and one begets the other; corrections are common and often occur during the summer months. The graph on the next page shows that in the US, market years with large declines have often ended up in positive, or at least less negative territory, than the intra-year declines might lead us to expect. (In the graph, the thin black lines trace the positive intra-year returns, and the thin red lines represent negative intra-year returns. The blue bars indicate how the market actually ended up for the year.)
While Alpha Fiduciary Model portfolios are in fact built across multiple asset classes to allow us to balance risk reduction with the desire for opportunistic exposures in hopes of capital growth, one thing we must accept is that in the short term all asset classes may become correlated in a market decline. Note that I said “may”, in this case recently our exposure to managed futures has actually increased in value mostly because they have been short the commodity complex as well as their currency positions having performed well.
We have been carefully watching our exposures and in most cases are pleased with their performance. In the case of MLP’s we have reviewed research from Credit Suisse, Wells Fargo, Goldman, and Duetsche Bank, as well as having spoken to the portfolio managers of several midstream MLP funds, and we do believe they will be able to continue to grow their distributions going forward. This is the bottom line of what the market is concerned about with MLP’s.
At this point the Alpha Fiduciary Investment Committee is viewing this decline as a sentiment-driven correction as opposed to something structural (such as the credit freeze which played a role in the 2008 decline). We did raise a small amount of cash (5%) a few weeks ago that we will deploy when we feel the timing is correct, but our focus at this time is to monitor the allocations and selections we have made. As for tactical allocation adjustments, we will use the model to guide us and at this time its forecasts are such that we would remain allocated as we are. If the model changes its stance we will take decisive action.