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Interactive Asset Allocation Tool

edited July 11 in Fund Discussions
From Research Affiliates, an update to their tool. (Rob Arnott)

Asset Allocation Tool

Comments

  • Just wondering if anyone has used this and what opinions you might have.
  • Hi, Mark.

    I haven't used the tool, per se. I've poked around a bit, and have read it in light of two other recent RA pieces. At base, this is simple visualization of the principle, "if value matters, then here's what has to happen for things to be more or less 'normal' a decade from now." So, given the prices people are currently paying for US large caps, it would take a decade of essentially zero returns (0.5% real) with normal economic growth for us to end the decade at "normal." If you happen to believe that "it's really different this time because (tech, the cloud, bitcoin, the Fed, politics, passive dominance, China)," you're unlikely to find this at all useful.

    The two pieces of theirs that I've been thinking about are an advisor presentation in which they graphed forward returns against current valuations. I'll try to post the graphics in our August issue. The short version: the relationship between valuations and returns are essentially zero over any 12 month period, nearly zero over any 36 month period, emergent over any 60 month period, and dauntingly like a straight line - say 90% plus - correlation over any 120 month period. In short, we can delude ourselves in the short-run that price doesn't matter but, in the long run, it very much matters.

    The second piece, published today, looks at bubbles and anti-bubbles. They got a lot of press in 2018 for their original piece defining a bubble but the section of that paper defining anti-bubbles was essentially ignored.
    An anti-bubble is an asset or asset class that requires implausibly pessimistic assumptions in order to fail to deliver a solid risk premium. In an anti-bubble, the marginal seller disregards valuation models, which are indicating the asset is undervalued.
    Today's piece identified three egregious current bubbles - Tesla, bitcoin and many large tech stocks - and issued the dual recommendation to avoid them and to avoid market-cap weighted indexes that are driven by them. The S&P 500 is 25% tech, with Microsoft, Apple, Amazon and Facebook alone accounting for 13% of the index. If the two shares of Alphabet stock (GOOG and GOOGL) were treated as one stock, then the top five stocks would all be tech and about comprise 16% of the index with an average unweighted P/E of 37.

    But RA also identified two anti-bubbles: emerging markets and, for people willing to enter the market slowly over time, UK stocks. They conclude, "Value-oriented smart beta strategies in both the developed and emerging markets offer investors promising investing opportunities outside the many bubbles in today’s global markets."

    For what that's worth,

    David
  • Thank you David for your thoughtful response. What prompted me to post this discussion was a comment provided by FD1001 on a M* discussion board. It suggested to me that despite the availability of the tool and the thought process behind it there is no guarantee of a successful outcome. That's true at least for PAUIX managed by Mr. Arnott compared to selected competing funds.

    Morningstar Discussion
  • hmm, p/e of 37 does not sound quite as high as I woulda thought, given the brouha about faamng overvaluations

    higher after today, surely
  • Hi Mark and @David_Snowball

    No heavy lifting with this question, just a "top of your head" thought; as I'm not going to take time to research any of Rob Arnott offerings or managed for Pimco and such.
    But, are there any of the RA related products that actually make any money above whatever the benchmark may be???
    PAUIX can't even outrun the simple TIP etf.

    Is there not a thought on a given day that someone in the "office" wonders about their offerings and long term performance; and scratches the head to wonder what is not being done correctly?

    Fifteen year total return chart of PAUIX, FBALX, ITOT and TIP

    The briefest amount of your time is appreciated.
    Thank you and good evening,
    Catch
  • edited July 14
    Hi, Catch.

    Two versions of the fund: All Asset and All Asset All Authority. Both have a contrarian bent (i.e., more value than momentum hence less US and more foreign than their peers). The difference is the All Asset All Authority is permitted both leverage and shorting, which I warned folks about many years ago.

    The vanilla version has substantially and consistently outperformed the souped-up on. Peer comparisons are hard because M* has changed All Asset's peer group three times in 10 years but, in generally, it has been a very solid performer (a little below average to substantially above) except for one period of about 30 months (in 2013-15). All Asset All Authority has kept the same peer group, has never excelled and has frequently stumbled. I'm guessing, though without detailed examination, that that's the cost of leverage and shorting.

    For me, that is brief.

    David
  • Hi Guys,

    Far too much data in these charts for a quick comment. Understanding it all is a true challenge.

    To quote Aristotle: “ The more you know, the more you know you don't know.” That is an accurate summary of my understanding of the economy and the stock market. Good luck to those who think they master these complex and ever changing subjects.

    Best Wishes


  • edited July 14
    Exactly. PAUIX's 20% short SPX position in a raging 'bull' market back then definitely dragged hard on it. I held it for a while during/after the GFC but dumped it once I realized they had no plans to reduce/exit that short position as the world around them changed..

    Hi, Catch.

    Two versions of the fund: All Asset and All Asset All Authority. Both have a contrarian bent (i.e., more value than momentum hence less US and more foreign than their peers). The difference is the All Asset All Authority is permitted both leverage and shorting, which I warned folks about many years ago.

    The vanilla version has substantially and consistently outperformed the souped-up on. Peer comparisons are hard because M* has changed All Asset's peer group three times in 10 years but, in generally, it has been a very solid performer (a little below average to substantially above) except for one period of about 30 months (in 2013-15). All Asset All Authority has kept the same peer group, has never excelled and has frequently stumbled. I'm guessing, though without detailed examination, that that's the cost of leverage and shorting.

    For me, that is brief.

    David

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