2016 MARKET OUTLOOK PREPARED JANUARY Newfound Case #

Transcription

1 2016 MARKET OUTLOOK PREPARED JANUARY 2016 Newfound Case #

2 LONG-TERM RETURN FORECASTS 2

3 EQUITY VALUATIONS Shiller Cyclically Adjusted Price-to-Earnings Ratio ( CAPE ): Price divided by 10-year average of earnings, adjusted for inflation. Current Shiller CAPE is in 89 th percentile of historical readings, implying that U.S. large-cap stocks are currently expensive Shiller Cyclically-Adjusted P/E Source: Robert Shiller; Newfound Research. 3

4 EQUITY VALUATION RETURN IMPLICATIONS Historically, valuations have been a strong predictor of long-term forward returns. With a Shiller CAPE reading of 26.03, 10-year annualized real returns are expected to be 4.9%. Forward Annualized 10-Year Real Return 25% 20% 15% 10% 5% 0% -5% Shiller CAPE vs Forward 10-Year Annualized Real Returns y = x % Shiller CAPE 4 See important disclosures at the end of the presentation.

5 ANOTHER WAY OF EVALUATING RETURNS Total Return = Investment Yield + Speculative Re-Pricing Investment Yield: Yield + Earnings Growth Speculative: Price change pressures due to over- or undervaluations; e.g. reversion to the mean of P/E ratios 5

6 OTHER EXPERTS ON EQUITY VALUATIONS Jack Bogle (Nominal)* Research Affiliates (Real)** Yield 2.0% 2.0% Growth 5.0% 1.3% Valuation -3.0% -2.1% Nominal Return 4.0% Inflation -2.0% Expected Real Return 2.0% 1.1% * Source: ** Source: 6

7 BOND VALUATIONS 10-Year U.S. Treasury rates sit near all-time lows. 10-Year Treasury Constant Maturity Rate Source: St. Louis Federal Reserve Economic Data Repository; Newfound Research. 7

8 BOND VALUATION RETURN IMPLICATIONS Starting yields are a great predictor for ending returns in a constant maturity bond index. At 2.2%, we can expect a 2.2% annualized return over the next decade from a constant maturity 10-year Treasury index. If we assume inflation is 2%, then this is a 0.2% real return. Subsequent 10-Year Return 18% 13% 8% 3% Bond Valuations vs. Subsequent Nominal 10-Year Returns ( ) R² = % 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Starting Yield 8 See important disclosures at the end of the presentation.

9 60/40 10-YEAR REAL RETURN FORECAST With Shiller CAPE Estimates 60% * 4.9% + 40% * 0.2% 3.03% With Jack Bogle Estimates 60% * 2.0% + 40% * 0.2% 1.28% With Research Affiliates Estimates 60% * 1.1% + 40% * 0.2% 0.74% 9

10 INVESTMENT IDEAS 10

11 IDEA #1: DIVERSIFY YOUR APPROACH Much like asset classes, different investment strategies will perform well in different market environments. Diversifying across multiple strategies has historically increased risk-adjusted returns. Chasing the recent performance of the best performing strategies, on the other hand, has proven to be destructive to risk-adjusted returns. Diversifying Across Strategies Increases Risk-Adjusted Performance Chasing Strategy Performance Destroys It Best 5-Year Track Best 3-Year Track Record Record U.S. Equity 60/40 Ivy Portfolio Tactical Equity Risk Parity Equal Weight Portfolio of Five Strategies Permanent Portfolio 11 Sharpe Ratio

12 IDEA #2: ACTIVELY MANAGE RISK 10-Year periods with poor returns tend to have a higher frequency and severity of drawdowns. A focus on reducing the impact of these drawdowns can help increase total return. Ulcer Index (Frequency & Severity of Drawdowns) for Different Quintiles of 10-Year Market Returns "Ulcer Index" Frequency and Magnitude of Drawdowns Poor Decade Below Average Decade Average Decade Above Average Decade Very High Decade Individual ETF Ideas: USMV, PBP, WDTI Managed Portfolio Idea: Newfound Risk Managed U.S. Sectors 12

13 IDEA #3: GO GLOBAL Valuations are the biggest drag on forward looking returns for U.S. equities. Many foreign markets are much more fairly priced and offer higher expected returns. U.S. Large Cap Emerging Market Equity EAFE Equity Yield 2.0% 3.1% 3.3% Growth 1.3% 1.5% 1.3% Valuation -2.1% 1.3% -0.4% FX 2.1% 1.1% Expected Real Return 1.1% 7.9% 5.3% 14.6% 23.7% 17.1% Source: Individual ETF Ideas: VEA, VWO, SCID, SCIX, SCIJ Managed Portfolio Idea: Newfound Risk Managed Global Sectors 13

14 IDEA #4: PURSUE ALPHA Equity factor exposures have historically outperformed the broad market and are widely used by institutional investors to increase risk-adjusted returns. Accessing a diversified basket of factors can help smooth out short-term under-performance of a single factor allocation % 17% 19% 13% 20% 17% 18% 5% -22% -26% 53% 45% 22% 21% 13% 8% 25% 17% 47% 36% 16% 16% 10% 6% 2.1% 16% 15% 14% 7% 6% 5% 16% 15% 15% 4% 1% -2% -37% -40% -41% 26% 26% 18% 19% 18% 15% 6% 2% -1% 17% 16% 15% 34% 32% 32% 15% 14% 13% 2% 1% -2% Average annual outperformance vs. the (SPY) across all factors (December 1996 to December 2015) 11% 3% 11% -4% -48% 17% 15% -1% 11% 25% 12% -8% Individual ETF Ideas: SCIU, RPV, RSP, MTUM, USMV, NOBL Managed Portfolio Idea: Newfound U.S. Factor Defensive Equity 14

15 IDEA #5: SEEK HIGHER YIELDS One way to increase total return is to increase yield. REITs EM Local Debt High Yield EM (Non-Local) Debt Bank Loans Yield 4.6% 3.2% 4.2% 3.2% 2.6% Growth -2.0% Roll 0.5% 1.5% 1.0% 0.6% Credit Loss -0.8% -2.8% -1.4% -1.0% Valuation -0.1% -0.3% -0.1% 0.1% FX 2.4% Expected Real Return 2.5% 5.0% 2.8% 2.6% 2.2% 21.8% 17.6% 9.8% 9.4% 8.6% Source: Individual ETF Ideas: VNQ, PCY, HYG, ANGL, EMLC, SNLN Managed Portfolio Idea: Newfound Multi-Asset Income 15

16 ACCESSING NEWFOUND 16

17 CONTACT thinknewfound.com

18 MUTUAL FUNDS thinknewfoundfunds.com 18

19 TAMP AVAILABILITY 19

20 DISCLOSURES Newfound s investment universe for Newfound investment strategies identified in this presentation includes and therefore may, at any time, hold positions the following ETFs: VNQ, PCY, HYG, EMLC, SNLN, RPV, MTUM, USMV, NOBL, RSP, PBP, WDTI. All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. These materials represent an assessment of the market environment at specific points in time and are intended neither to be a guarantee of future events nor as a primary basis for investment decisions. The performance results should not be construed as advice meeting the particular needs of any investor. Neither the information presented nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any security. Past performance is not indicative of future performance and investments in equity securities do present risk of loss. Newfound Research LLC s results are historical and their ability to repeat could be affected by material market or economic conditions, among other things. 20

21 DISCLOSURES P4 Source: Robert Shiller; Newfound Research. Past performance does not guarantee future results. Data is for the period from January 1871 to September year annualized real returns were calculated by adjusting the 10-year total return of the U.S. equity market for inflation using the Consumer Price Index and converting to an annualized return. The Consumer Price Index measures changes in the price level of a market basket of consumer goods and services. Prior to 1923, U.S. equity market returns refer to the common stock index maintained by Cowles Commission, which is an unmanaged composite of all stocks listed on the New York Stock Exchange for which data was available when the index was calculated in From 1923 to 1926, the S&P 233 is utilized, which is an unmanaged composite of 233 large capitalization companies calculated weekly. From 1926 to March 1957, the S&P 90 is utilized, which is an unmanaged composite of 90 large capitalization companies calculated daily. From March 1957 to present, the is utilized. The index is an unmanaged composite of 500 large capitalization companies. The index is widely used by professional investors as a performance benchmark for large-cap stocks. You cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. The referenced index is shown for general market comparisons and is not meant to represent any Newfound index or strategy. P8 Source: Newfound Research, Federal Reserve Bank of St. Louis, Yahoo! Finance. Past performance does not guarantee future results is the first year for the information presented because 1953 is the first date with monthly 10-year constant maturity interest rate data. Data is through 2/28/15. Yields are defined as the coupon rate of 10-year U.S. Treasuries on their issue date. The 10-Year U.S. Treasuries index is a constant maturity index calculated by assuming a 10-year bond is purchased at the beginning of every month and sold at the end of that month to purchase a new bond at par at the beginning of the next month. You cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses or sales charges. The referenced index is shown for general market comparisons and is not meant to represent any Newfound index or strategy. R 2 is the coefficient of determination, which ranges between 0 and 1, inclusive, and quantifies how well the data is described by a linear model. 21

22 DISCLOSURES P11 Source: Yahoo! Finance and Newfound Research LLC. Past performance does not guarantee future results. Data is through December 24m The Ivy portfolio consists of a 40% allocation to global equities (VHGEX) a 20% allocation to fixed income (VBIIX), a 20% allocation to commodities (DGL and DBC and related indices prior to ETF launch), and a 20% allocation to REITs (VGSIX). The permanent portfolio consists of a 25% allocation to U.S. Equities (VTSMX), a 25% allocation to long-term Treasuries (VUSTX), a 25% allocation to cash equivalents (VFISX), and a 25% allocation to gold (DGL). The risk-parity portfolio consists of an equal risk contribution allocation to global equities (VGHEX), fixed income (VUSTX and VBIIX), and commodities (DGL and DBC). The 60/40 portfolio consists of a 60% allocation to global equities (VHGEX) and a 40% allocation to fixed income (VBMFX). The tactical equity portfolio allocates to U.S. equities (VTSMX) when its 50-day moving average is above its 200-day moving average and to cash equivalents (VFISX) otherwise. U.S. equities are represented by VTSMX. P12 Source: Robert Shiller; Newfound Research. Past performance does not guarantee future results. Data is for the period from January 1871 to December year annualized real returns were calculated by adjusting the 10-year total return of the U.S. equity market for inflation using the Consumer Price Index and converting to an annualized return. The Consumer Price Index measures changes in the price level of a market basket of consumer goods and services. Prior to 1923, U.S. equity market returns refer to the common stock index maintained by Cowles Commission, which is an unmanaged composite of all stocks listed on the New York Stock Exchange for which data was available when the index was calculated in From 1923 to 1926, the S&P 233 is utilized, which is an unmanaged composite of 233 large capitalization companies calculated weekly. From 1926 to March 1957, the S&P 90 is utilized, which is an unmanaged composite of 90 large capitalization companies calculated daily. From March 1957 to present, the is utilized. The index is an unmanaged composite of 500 large capitalization companies. The index is widely used by professional investors as a performance benchmark for large-cap stocks. You cannot invest directly in an index and unmanaged index returns do not reflect any fees, expenses orsales charges. The referenced index is shown for general market comparisonsand is not meant to represent any Newfound index or strategy. 22

23 DISCLOSURES P14 Source: Yahoo! Finance, Newfound Research. Past performance does not guarantee future results data is through 12/30/15. To compute the average annual return differentials, partial year returns are annualized. is represented by the Guggenheim Pure ETF and the underlying index prior to the ETF s launch. is represented by the ishares MSCI USA Minimum ETF and the underlying index prior to ETF launch. is represented by the Guggenheim Equal Weight ETF and the underlying index prior to ETF launch. is represented by the ishares MSCI USA Factor ETF and the underlying index prior to ETF launch. is represented by the ProShares Aristocrats ETF and the underlying index prior to ETF launch. The is represented by the SPDR ETF. The referenced ETFs/indices are shown for general market comparisons and are not meant to represent the strategy. 23