SPDR® SSGA Multi-Asset Real Return ETF (RLY) – Q1 2021 Commentary

During the first quarter of 2021, RLY finished up in absolute returns and outperformed its custom strategic benchmark. The fund finished the quarter with overweights to natural resource equities, commodities, global infrastructure and gold.

The main driver of outperformance was our decision to underweight inflation-linked bonds in order to fund more risk-oriented assets, mainly core commodities and global natural resource equities. An underweight to international real estate investment trusts (REITs) also benefited performance and helped offset negative impacts from an overweight to gold. The ramp up of vaccine distributions, record fiscal stimulus and better COVID-19 trends offset inflation concerns as the reflation trade continued, pushing assets better correlated with improving economic growth higher. The overweight to core commodities and core global natural resources, both up double digits, aided returns. International REITs finished higher, but trailed other risk assets leading to positive relative performance from our underweight. On the negative side, positive COVID-19 trends and upward revisions to economic growth weighed on gold, which significantly underperformed risk assets and dented performance.

Fund Performance

Portfolio Allocations

Portfolio Positioning and Outlook
From a strategic asset allocation perspective, we made a few asset allocation shifts that went into effect on April 1, 2021. First, we replaced the current core US Treasury inflation-protected security (TIPS) strategy with an intermediate version, our US TIPS 1-10-year strategy. For a modest forfeiture of yield, the intermediate TIPS exposure should help improve the forecasted risk-return profile with a higher return and lower volatility. Additionally, the change shortens duration which leads to less sensitivity to interest rate volatility while also improving the inflation beta and correlation to US consumer price index for the fund. Secondly, we have reduced the allocation to US REITs and US TIPS by 5% each in favor of a 10% increase in the global infrastructure allocation. This shift improves our forecasted risk-return profile while also increasing the global diversification of the strategy and its equity exposure.

The outlook for real assets appears constructive as realized inflation is set to move higher in the coming months coupled with plentiful stimulus, pent-up demand, and bold infrastructure spending plans.

Brighter prospects of economic reopening and elevated inflation risks have been a boon to equity-oriented real assets. We continue to diversify our growth asset exposure with healthy allocations to commodities, global infrastructure and global natural resource equities. Commodities have benefited from better price momentum and favorable curve dynamics. Further, robust oil demand, the continuation of vaccine rollouts and easing of mobility restrictions buoys the energy sector, while a combination of strong and improving consumer demand, coupled with the push for green energy, supports industrial metals. Decarbonization and other green energy thematics have also provided a boost for infrastructure equities and the upcoming US infrastructure stimulus, which is set to provide spending and tax credits in order to update traditional infrastructure and accelerate the move to renewable energy, should provide further support. Global natural resource equities should also benefit from the aforementioned tailwinds.

Brighter prospects of economic reopening and supportive risk appetite bode well for the REITs, but our outlook is rather somber and we prefer to take risk elsewhere. Short-term price momentum is positive, but this offset by weak earnings and sales sentiment that hasn’t recovered since mobility restrictions cratered demand in 2020.

Gold has started to lose its shine as the precious metal has not responded well to the current reflation thematic. While fundamental factors like debt to GDP and real rates remain mildly constructive, the technical indicators we monitor have deteriorated. Further, as rates grind higher, gold becomes a more expensive insurance for our exposure to risk assets and the opportunity costs to hold it increase.

Market Regime Forecasts
The Market Regime Indicator (MRI) employs a quantitative framework and forward-looking market indicators, including equity- and currency-implied volatility, as well as credit spreads, to identify the current market risk environment. Tracking risk appetite shifts in the market cycle helps frame tactical asset allocation and volatility targets.

A Look at the MRI