ECAM Asset Allocation Fund

I have had a number of people over the past year ask me what I do with my personal investments outside the mandated A and B accounts of the Emirates Provident Fund.

As I have said previous, I am not a strong supporter of the Emirates Provident Fund and only invest the minimum amount required within the fund monthly (as defined by the rules governing the Provident Fund). In other words, the money the company puts into my "A" account and the mandated 5% I must put into the fund by way of the "B" account is the only money I invest in the Provident Fund. All additional funds I invest outside the Provident Fund in my own personal "C" account through several U.S. brokerage firms.

The reason why I have elected to do so is due to the limited access to various investment vehicles offered within the Provident Fund. In my opinion, there are insufficient funds offered within the Provident Fund to allow for optimal asset allocation.

As I said in a previous blog:

Having said that, I am still cautious as indicated by my current EK provident fund A/B account positioning. The reason this is the case is because the limited nature of the available investment funds within the Emirates provident fund A/B accounts does not allow for reasonable market positioning based upon strategic asset allocation. This is a failing of the merits of the fund and the reason why the majority of fund participants will never experience long term capital appreciation within their individual provident fund accounts. My attempts with this blog have been to attempt to suggest portfolio positioning within these accounts as defined by these constraints.

This is not the case with what I refer to as my personal "C" account (which, in the future will be referred to as the ECAM Asset Allocation Fund). This fund is my personal account (which is currently 100% invested) that I manage daily to maximize investment return while limiting downside potential.

Today in this blog I will discuss my personal investment exposure, which will be referred to as the ECAM Asset Allocation Fund.

First a little background is in order. Over the years many studies have been done on how to structure a portfolio. There have been studies on individual stocks, studies on mutual funds and studies on ETF's (Exchange Traded Funds). In all these studies it was determined that the single major determinant in the overall return of a portfolio was not the individual "picks" but the overall asset allocation.

The concept of asset allocation has been around for many years. However, in the past 5 years it has jumped to the forefront as the most important aspect of portfolio design.

In the past the common asset allocation model was structured around a mix of equities (stocks) and bonds. Over the years "standard" rules were developed to determine the ratio that should be held within a portfolio. The standard "60% equities/40% bonds" was gradually replace by the "100 - your age = your allocation to equities" rule of thumb.

While this attempt at asset allocation was commendable, it did very little to address the other investment vehicles available to individuals in designing a portfolio. It did not allow for Real Estate, Commodities, or Emerging Markets.

The concept of strategic asset allocation began in the U.S. with the Ivy League universities (predominately Yale and Harvard University). It was discovered through Monte Carlo Simulation (essentially using computers to model hundreds of thousands of possible outcomes to a given event; google "Monte Carlo Simulation" for more information if interested) that it was possible to actually INCREASE the rate of return within a portfolio and DECREASE the volatility and draw down of an investment account by adding non-correlated asset classes that were in the past thought to be too "risky". It is this concept that Yale and Harvard use in managing their endowment funds.

Unfortunately, while the concept of strategic asset allocation works well in maximizing performance while reducing volatility and draw downs, it does not alleviate the severe draw downs that occur during bear markets. The avoidance of large draw downs can only be avoided by way of market timing.

The concept of market timing using Technical Analysis is well known by those who visit the site. The standard investment industry mantra that "you can't time the market" is well versed, constantly repeated, and continually wrong.

If it is possible to time the market, why does the industry continue to say it is not possible? Quite simply, it is because the industry makes it's profits based upon the assets it has under management. If your money is not in their accounts (where they can charge you a fee), they are not making money.

This concept is very important in differentiating the difference between a "relative return" manager (your typical mutual fund or investment advisers such as Mondial, Global Eye, etc) and "absolute return" fund managers (your typical hedge fund or what I do).

A "relative return" manager does not care how much you make or do not make in your account. All a relative performance manager cares about is whether he can outperform whatever benchmark he establishes as his "marker" to define under or out performance. He takes your money, invests it in the markets, collects his monthly fees and attempts to outperform his benchmark.

This is all well and good in a rising market but what if the market turns down? In all cases, the relative performance manager will keep you invested irrespective of market direction (because his paycheck depends upon you paying him his fee monthly). He will still attempt to outperform his benchmark but if the benchmark falls 30% and your investment only falls 29%.....he considers that a success as he has "outperformed" the benchmark. I do not consider that success.

The other type of manager is the "absolute return" type. He does the same as the "relative return" type in a bull market (attempting to outperform the benchmark) but in a bear market when prices are falling he will either have your money safely in cash or have part of the funds actually invested short the market (which allows you to make money on a falling market).

Using this concept, I have designed the ECAM Asset Allocation Fund based upon what I believe is the optimal strategy. When the technical indicators are positive I use strategic asset allocation to maximize returns within the portfolio while minimizing draw downs. However, when the technical indicators point to a longer term decline I move the funds to cash along with up to a 50% short exposure to take advantage of the declining market to add to performance.

Using this concept, I invest in Exchange Traded Funds (ETF's) that allow for optimum asset allocation. The ETF's I choose offer the lowest MER (management expense ratio) which allow me to pay the least fees to the fund company and maximize my returns.

The composition of the ECAM Asset Allocation Fund takes into account 5 distinct asset classes and the following percentages within the portfolio:

1) U.S. Domestic Stocks-15%
2) Foreign Stocks-25%
3) Bonds-15%
4) Real Estate-15%
5) Commodities-20%

Using these 5 non-correlated asset classes results in above average returns over a standard benchmark (S&P 500 Index) while reducing draw downs. Sharp eyes will note the total above is only 90%.....where is the other 10%? More on that below.

To break the asset classes down further, I have set up the portfolio as follows:

U.S. Domestic Stocks (15%):

-U.S. large cap stocks-10%
-U.S. small cap stocks-5%

Foreign Stocks (25%):

-Developed Markets ex-U.S.-15%
-Emerging Markets-10%

Bonds (15%):

-U.S. Domestic bonds-10%
-U.S. TIPS (inflation protected bonds)-5%

Real Estate (15%):

-U.S. Real Estate-10%
-Foreign Real Estate-5%

Commodities (20%):

-"Hard" Commodities basket-10%
-"Soft" Commodities basket-10%

Discretionary (10%):

The discretionary part of the portfolio allows me to invest in areas that are capable of generating "alpha" to allow for additional returns within the portfolio. This can take the form of any asset class I deem of sufficient strength and non-correlation to the other asset classes to be included.

Based upon the above, here is the current breakdown of the portfolio:

1) U.S. Domestic stocks

-VTI (Vanguard Total Market ETF) 10%
-VB (Vanguard Small Cap ETF) 5%

2) Foreign Stocks

-VEU (Vanguard FTSE All-World ex-US ETF) 15%
-VWO (Vanguard Emerging Markets ETF) 10%

3) Bonds

-BND (Vanguard Total Bond Market ETF) 10%
-TIP (iShares Barclays TIPS Bond Fund ETF) 5%

4) Real Estate

-VNQ (Vanguard REIT ETF) 10%
-RWX (SPDR DJ Wiltshire Intl Real Estate Index ETF) 5%

5) Commodities

-DBC (DB Commodities Tracking Index ETF) 10%
-DBA (PowerShares DB Multi-Sector Commodity Trust Agriculture Fund) 10%

6) Discretionary

-GDX (Market Vectors Gold Miners ETF) 5%
-FXA (Currency Shares Australian Dollar Trust) 5%



The fund is managed as follows:

1) When my technical indicators for each asset class (some previously published, some proprietary) indicate it is safe to be in the market over the medium-long term, the funds are fully invested as described previous.

2) The percentages are rebalanced quarterly to maintain the optimum asset allocation. Higher return assets are sold and lower return assets are bought (the classic "sell high/buy low" strategy).

3) The discretionary part of the portfolio is reviewed weekly and funds bought or sold based upon their technical strength and degree of non-correlation to the other asset classes.

4) When a given asset is determined to be medium to long term technically weak, that asset is sold and the proceeds from that asset class are moved into cash.

5) At the point at which the majority of the asset classes have become technically weak (and are held in cash), strategic shorts are placed into the fund (with a cap of a 50% short allocation as being the maximum allowed within the fund) to capitalize on longer term downtrends within bear markets and add value to the fund.

Using this combination of strategic asset allocation and market timing will ultimately deliver a superior rate of return over the traditional "buy and hold" strategy. As such, the ECAM Asset Allocation Fund is currently 100% invested as per above. As market conditions change I will include the status of the funds position in my future blogs along with my Provident Fund positions.

I have been asked by many people whether I might be interested in managing their funds for them. I will not do so currently given the considerable time I would want to put into doing so and my current time constraints. However, in the future I may consider doing so and will use the ECAM Asset Allocation Fund as my personal benchmark in determining projected rates of return.