SPDR® SSGA Global Allocation ETF (GAL) – Q1 2021 Commentary
During the first quarter of 2021, GAL finished up in absolute returns and outperformed its custom strategic benchmark. The fund finished the quarter with an overweight to equities and commodities while favoring US long credit bonds within fixed income.
Performance Directionally, our overweight to growth assets, both equities and commodities, and corresponding underweight to aggregate bonds aided relative performance. Relative value positioning within fixed income was marginally positive, but positioning within equities dented relative returns. The overweight positioning to equities during the quarter added value. Despite bouts of volatility, equity returns were positive and outperformed bonds. With our risk indicator, the Market Regime Indicator (MRI) touching Euphoria toward the end of February, we reduced our equity overweight which proved advantageous as inflation concerns and a backup in yields pressured equities lower. We increased our position in March which also proved beneficial as equities recovered to close higher. Improving macroeconomic fundamentals and favorable curve dynamics supported our overweight to commodities and aided performance.
Commodities benefited from improving optimism, positive re-opening trends and the continuation of the reflation trade. On the negative side, allocations that included an underweight to REITs and an overweight to emerging markets hurt performance during Q1. The pro-cyclical rally, which saw re-opening plays outperform pandemic winners, propelled REITs higher and our sizable underweight negatively impacted performance. Emerging market equities finished up on the quarter, but trailed their developed counterparts, particularly the US which was the top-performing region, leading to underperformance from our overweight. Overweight to gold also detracted as positive COVID-19 trends and upward revisions to economic growth have weighed on the precious metal, which significantly underperformed assets whose value is more tied to improving economic conditions.
Portfolio Positioning and Outlook There are certainly pockets of equity markets that look frothy, some of which have cooled off during the back half of the first quarter. But from a high level perspective, the market internals of late appear to reflect more robust growth and optimism surrounding economic reopening. Our quantitative models continue to prefer equities as strong sentiment with respect to both earnings and sales expectations, coupled with positive momentum factors, outweigh stretched valuations and softening quality scores. Regionally, the US remains our favored region due to strong price momentum, positive macro scores and robust earnings and sales estimates, which offset unfavorable valuations. Our forecast for Europe has deteriorated as feeble price momentum, conjoined with weak sales and earnings expectations offset positive valuation metrics. Pacific equities also look attractive as positive sentiment, coupled with still attractive valuations, buoyed our outlook. Elsewhere, improved risk appetite and recovering manufacturing activity bolstered our outlook for emerging market equities. Our favored equity sectors include a balance of those that skew towards growth (Technology and Communication Services) and some that rhyme with value (Financials, Energy and Materials).
At the moment we continue to see some additional upward pressure for interest rates in most developed markets. Our views are influenced by improving economic data and also take into account possible over-reactions to prevailing and upcoming inflation prints. Risks of inflation appear to be more tangible than they have been for quite some time, at least from an intermediate horizon or secular perspective. Our positive outlook for credit is driven in part by our models, which forecasted a steeper yield curve, implying positive future economic conditions and tighter credit spreads. Further, despite relatively tight spreads (much like valuations for most assets), the credit environment still looked attractive against a better economic backdrop.
Brighter prospects of economic reopening and elevated inflation risks have been a boon to commodity markets. We continue to diversify our growth asset exposure with a healthy allocation to commodities, driven by improving macroeconomic fundamentals, better price momentum and favorable curve dynamics. The position is not without risk — COVID-19 flareups and a reduction in Chinese credit growth — but with plentiful stimulus funds unspent in the United States and bold infrastructure spending plans, the outlook for commodities overall still looks constructive in our view.
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
Real Estate Investment Trust (REIT) Companies that own and operate commercial properties, such as office buildings and apartment complexes.
Commodities Basic goods used in commerce that are interchangeable, or “fungible,” with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services For example, crude oil is a commodity that is used to make motor fuels, and heating oil and lubricants.
Emerging Markets Developing countries where the characteristics of mature economies, such as political stability, market liquidity and accounting transparency, are beginning to manifest. Emerging market investments are generally expected to achieve higher returns than developed markets but are also accompanied by greater risk, decreasing their correlation to investments in developed markets.
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ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs’ net asset value. Brokerage commissions and ETF expenses will reduce returns.
Actively managed ETFs do not seek to replicate the performance of a specified index. Because the SPDR SSGA Active Asset Allocation ETFs are actively managed, they are therefore subject to the risk that the investments selected by State Street Global Advisors may cause the ETFs to underperform relative to their benchmarks or other funds with similar investment objectives. Investing in the fund involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment.
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Investing in REITs involves certain distinct risks in addition to those risks associated with investing in the real estate industry in general. Equity REITs may be affected by changes in the value of the underlying property owned by the REITs, while mortgage REITs may be affected by the quality of credit extended. REITs are subject to heavy cash flow dependency, default by borrowers and self-liquidation. REITs, especially mortgage REITs, are also subject to interest rate risk (i.e., as interest rates rise, the value of the REIT may decline).
Commodities investing entails significant risk as commodity prices can be extremely volatile due to wide range of factors.
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