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Just happened to read over T Rowe Price's November 30, 2015 Semiannual Report for their full line of Retirement Funds recently. They noted back than (3 months ago): "Equity valuations are above historical measures by several measures ...". That's harsh coming from a normally optimistic house.
They weren't screaming sell - but were positioning their retirement portfolios away from what they saw as overvalued areas. The 40/60 Retirement Balanced Fund TRRIX (which I hold) was still at nominal weighting. Interestingly, more than half the equities held were through their Index 500 fund. They noted that their broader diversification had caused these funds to lag their benchmarks recently. Especially problematic was their small allocation to PRAFX, Price's Real Assets Fund.
My take was that they saw the best valuations in foreign markets, especially developed European and some (but not all) of the EM variety. They were cautious on junk bonds, seeing valuations stretched and very cautious on U.S. growth stocks - particularly health and tech. Seemed to me they saw value in some energy producers beginning to emerge, but were still cautious,
Although the report is 3 months old, sometimes it helps to look in the rear-view mirror. Makes me wonder if they may have done some repositioning in late fall or early winter which might have added fuel to the fire as equities began a sharp decline about than.
Added: The recent rally has been nice, especially for some of us overweight energy and commodities. But I'll note dryly that much lauded PRWCX hasn't participated much. On one recent strong market day last week it was my worst performer out of a dozen funds, managing to lag even their diversified income fund, RPSIX. The underperformance was notable all through last week. Too defensively positioned in this environment? We shall see.
In addressing the title of this post ... This Bull Market Gets No Respect ... herein might be why.
As most of you know I am a student of the markets and follow them fairly closely for a retail investor. In tracking the P/E ratio of the S&P 500 Index my reference source (WSJ) is reporting the TTM P/E ratio at 23.1 and froward estimates at 16.6. With market close (Friday) the Index closed just short of 2000. In doing the math this puts TTM earnings at about $87.00 and forward estimates at about $120.00. I am thinking forward estimates are set way too high and will be revised downward as we move through the year and with this the forward price to earnings ratio will rise. For me, this makes stocks way too expensive; and, I have now begun to throttle (rebalance) my asset allocation towards the low range for me within my asset allocation. When done, I'll be cash heavy (come summer).
Interestingly, I now hold about 50% of my overall portfolio (asset wise) in hybrid funds that can adjust their asset allocations as to how they are reading certain elements in the markets. One fund that I own and follow is ABALX which at one time was in the 70% range in stocks has trimmed back its equity holdings to the low 60% range and raised its foreign weightings. Another fund that I own and follow that adjust it's stock allocation is CTFAX. In this fund as stocks pull back it loads equities and then pairs it's stock allocation as they recover. These are not the only two funds that I own that adjust their allocations to some element of market movement. In addition, I have at times throttle my overall asset allocation myself; and, I am now thinking I need to be towards the low range somewhere around 40% to 45% equity; and, due to anticipated rising interest rates I need to be towards the low range in bonds with short durations and high yields. This leaves me with a boat load of cash. However, cash is good as it beats vaporized profits.
When I finsh my rebalance process, over the next couple of months, I am thinking I'll be somewhere around 35% cash, 40% equity and 25% bonds. And, within equities I'll overweight the traditional defensive sectors plus a few others. Not so sure about healthcare.
My specialty / theme sleeve currently consists of three themes. They are private equity along with business development, infrastructure and emerging markets. My best performing sleeve last week was my small/mid cap sleeve which was up 4.7%. Year-to-date, my three best performing funds are FDSAX (+5.3%), PGUAX (+5.0%) & SVAAX (+4.3%). And, on Friday my portfolio went positive for the year while it's bogey (the Lipper Balanced Index) is down about -0.8% along with the 500 Index being down about -2.1%. This is telling me the hybrid portfolio has been the better performer through these uncertain times. It is interesting that my income sleeve (which holds a good representation of bank loan, short duration and high yield funds) has not yet gone positive for the year ... but, perhaps, soon will as it is only down -0.1%.
Thanks for the thorough analysis. You are much more a student of market history and behavior than I and I respect your analysis. Additionally, I'm now 80% buy and hold (mixed assets of course), so don't have much wiggle room to play around regardless of market valuation. But it's still an interesting if relatively insignificant game.
The wiggle room is in how much of the remaining 20% is devoted to equity funds vs cash. The choice of equity fund(s) also allows for discretion. A 10/10 (cash/equity) split would represent a neutral stance. Currently I've allocated only about 5-6% to cash, That leaves about 8% in PRNEX (nat resources), 4% in PRLAX (Latin America) just 1-2% in PRWCX, which is closed to new investors. The just under 6% cash is up from around 4% a few weeks ago. I'll continue to move to cash, but very gradually, if markets remain strong in coming weeks. Eventually, I'll increase PRWCX - but that's farther off.
From the above, one might discern I've been focused on funds that will benefit from inflation and/or improving commodities prices. I hasten to add that I am simply an amature, not an expert, and so could be wrong in this approach. I think I'd agree with you, T.Rowe Price and many others here that overall equity valuations are on the high side. But I've long suspected that the energy rout was overdone, so sense some reasonable valuation there.
BTW, some of the funds in my 80% buy and hold portion have done nicely lately: OPGSX, OREAX, and OEMAX. No wiggle room there, except that I'm ready to dump OPGSX whenever Rono gives the sell signal on the p/m sector.
Comments
They weren't screaming sell - but were positioning their retirement portfolios away from what they saw as overvalued areas. The 40/60 Retirement Balanced Fund TRRIX (which I hold) was still at nominal weighting. Interestingly, more than half the equities held were through their Index 500 fund. They noted that their broader diversification had caused these funds to lag their benchmarks recently. Especially problematic was their small allocation to PRAFX, Price's Real Assets Fund.
My take was that they saw the best valuations in foreign markets, especially developed European and some (but not all) of the EM variety. They were cautious on junk bonds, seeing valuations stretched and very cautious on U.S. growth stocks - particularly health and tech. Seemed to me they saw value in some energy producers beginning to emerge, but were still cautious,
Although the report is 3 months old, sometimes it helps to look in the rear-view mirror. Makes me wonder if they may have done some repositioning in late fall or early winter which might have added fuel to the fire as equities began a sharp decline about than.
http://individual.troweprice.com/staticFiles/gcFiles/pdf/srrpe.pdfg
FWIW
---
Added: The recent rally has been nice, especially for some of us overweight energy and commodities. But I'll note dryly that much lauded PRWCX hasn't participated much. On one recent strong market day last week it was my worst performer out of a dozen funds, managing to lag even their diversified income fund, RPSIX. The underperformance was notable all through last week. Too defensively positioned in this environment? We shall see.
In addressing the title of this post ... This Bull Market Gets No Respect ... herein might be why.
As most of you know I am a student of the markets and follow them fairly closely for a retail investor. In tracking the P/E ratio of the S&P 500 Index my reference source (WSJ) is reporting the TTM P/E ratio at 23.1 and froward estimates at 16.6. With market close (Friday) the Index closed just short of 2000. In doing the math this puts TTM earnings at about $87.00 and forward estimates at about $120.00. I am thinking forward estimates are set way too high and will be revised downward as we move through the year and with this the forward price to earnings ratio will rise. For me, this makes stocks way too expensive; and, I have now begun to throttle (rebalance) my asset allocation towards the low range for me within my asset allocation. When done, I'll be cash heavy (come summer).
Interestingly, I now hold about 50% of my overall portfolio (asset wise) in hybrid funds that can adjust their asset allocations as to how they are reading certain elements in the markets. One fund that I own and follow is ABALX which at one time was in the 70% range in stocks has trimmed back its equity holdings to the low 60% range and raised its foreign weightings. Another fund that I own and follow that adjust it's stock allocation is CTFAX. In this fund as stocks pull back it loads equities and then pairs it's stock allocation as they recover. These are not the only two funds that I own that adjust their allocations to some element of market movement. In addition, I have at times throttle my overall asset allocation myself; and, I am now thinking I need to be towards the low range somewhere around 40% to 45% equity; and, due to anticipated rising interest rates I need to be towards the low range in bonds with short durations and high yields. This leaves me with a boat load of cash. However, cash is good as it beats vaporized profits.
When I finsh my rebalance process, over the next couple of months, I am thinking I'll be somewhere around 35% cash, 40% equity and 25% bonds. And, within equities I'll overweight the traditional defensive sectors plus a few others. Not so sure about healthcare.
My specialty / theme sleeve currently consists of three themes. They are private equity along with business development, infrastructure and emerging markets. My best performing sleeve last week was my small/mid cap sleeve which was up 4.7%. Year-to-date, my three best performing funds are FDSAX (+5.3%), PGUAX (+5.0%) & SVAAX (+4.3%). And, on Friday my portfolio went positive for the year while it's bogey (the Lipper Balanced Index) is down about -0.8% along with the 500 Index being down about -2.1%. This is telling me the hybrid portfolio has been the better performer through these uncertain times. It is interesting that my income sleeve (which holds a good representation of bank loan, short duration and high yield funds) has not yet gone positive for the year ... but, perhaps, soon will as it is only down -0.1%.
I wish all ... "Good Investing."
Old_Skeet
Thanks for the thorough analysis. You are much more a student of market history and behavior than I and I respect your analysis. Additionally, I'm now 80% buy and hold (mixed assets of course), so don't have much wiggle room to play around regardless of market valuation. But it's still an interesting if relatively insignificant game.
The wiggle room is in how much of the remaining 20% is devoted to equity funds vs cash. The choice of equity fund(s) also allows for discretion. A 10/10 (cash/equity) split would represent a neutral stance. Currently I've allocated only about 5-6% to cash, That leaves about 8% in PRNEX (nat resources), 4% in PRLAX (Latin America) just 1-2% in PRWCX, which is closed to new investors. The just under 6% cash is up from around 4% a few weeks ago. I'll continue to move to cash, but very gradually, if markets remain strong in coming weeks. Eventually, I'll increase PRWCX - but that's farther off.
From the above, one might discern I've been focused on funds that will benefit from inflation and/or improving commodities prices. I hasten to add that I am simply an amature, not an expert, and so could be wrong in this approach. I think I'd agree with you, T.Rowe Price and many others here that overall equity valuations are on the high side. But I've long suspected that the energy rout was overdone, so sense some reasonable valuation there.
BTW, some of the funds in my 80% buy and hold portion have done nicely lately: OPGSX, OREAX, and OEMAX. No wiggle room there, except that I'm ready to dump OPGSX whenever Rono gives the sell signal on the p/m sector.
Regards