Text on screen: PIMCO
Text on screen: Robert Arnott, Founder and Chairman, Research Affiliates
Rob Arnott: The initial COVID crash, which ran from February 19 all-time high for the market to March 23rd, a 34% drop in just 5 weeks, was a nowhere to hide crash for risk markets. Basically, anything with a whiff of risk crashed roughly proportional to its perceived risk, not in proportion to its perceived vulnerability or valuation levels.
In the first quarter, we saw a sharp drop in equities all over the world. Across core bonds, pretty uninspired first quarter numbers except for long treasuries. And in third pillar, everything except TIPS got savaged. The snapback recovered much of the damage in mainstream stocks, a little under half the damage in core bonds, and a little over half the damage in diversifiers. All Asset & All Asset All Authority performed strongly against those third pillar assets, recovering well over half of the first quarter drop in that second quarter.
Text on screen: Chris Brightman, Chief Investment Officer, Research Affiliates
Chris Brightman: Volatility creates potential opportunity for tactical asset allocation. Our tactical activity is highly correlated with volatility. More vol may mean more opportunity which may lead to more turnover. Over recent months, the unprecedented speed of market movements was matched by an increase in our tactical repositioning.
In our positioning within All Asset, at yearend 2019, we held relatively concentrated positions, pairing 40% in emerging markets stocks and bonds with 40% in investment grade bonds, TIPS and liquid alternatives. Then, in March and April, we moved quickly to a much more risk-on position by adding 20% to developed market equities, REITs and commodities, while pairing back a bit in EM. As stock prices recovered in May and June, we've become more defensive, taking profits and buying long bonds. Given heightened uncertainty and continued policy intervention, we've now deliberately moved to a more diversified portfolio.
Turning to the All Authority, we see a bit more aggressive changes in positions, but directionally the same as All Asset. We started the year with more than 40% in EM stocks and bonds paired with a greater than 20% short to the S&P 500. In March and April, we moved quickly to a much more risk-on position, briefly going net long US stocks in April. We've since taken profits and become more defensive and more diversified.
With highly elevated uncertainty and finding that returns are not being driven by economic fundamentals but by policy intervention in markets, we think that a more diversified portfolio is prudent.
Rob Arnott: I see three tailwinds that could help us tremendously. One is inflation expectations, which crashed during the COVID crash. Central bankers all over the world are determined to introduce a certain measure of inflation and the monetary stimulus we've seen certainly is an aggressive effort in that direction.
The second tailwind is that the dollar has of course soared. What asset classes are likely to do well if the currencies rebound? Emerging markets assets do well if the dollar falters. Commodities do well if the dollar falters. And EAFE also does very well if the dollar falters.
The third tailwind is perhaps the strongest of all. Value has never historically underperformed growth by as wide a margin as today.
That's not to say they can't underperform.
I think we've got very good odds that value is going to snap back handily.
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Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice. Covid-19 is represented by the significant market downturn which occurred during February and March 2020, due to the Covid-19 pandemic. Current market movements may not be reflective of this time period, as the Covid-19 pandemic is ongoing.
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