The global equity markets have recovered and are realising new peaks even though it has been volatile in the recent weeks – our view is that equities may still do well this year due to the US stimulus and positive outcomes from the COVID-19 vaccination programmes, at least in the short-term. The stock market has recovered despite the lack of economic fundamentals to support it. Therefore, the risks that affect the investment portfolio can still arise from inflation, deflation, or even other black swan events like the COVID-19, which was an unexpected event with a massive impact.

What Asset Allocation has done for Unicorn:



Unicorn’s VIPS portfolio (blue line) has outperformed both the MSCI All-World Index and the Straits Times Index (STI) last year as Asset Allocation had given the portfolio a resilience that a 100% equities portfolio cannot replicate. Our portfolio thus did not have to spend too much time playing catch-up.

If we were to learn from history’s Great Depression, the stock market had suffered the worst crash to date in 1929 with an 89% drawdown. After a period of wild speculation during the roaring 1920s, the market had reached its peak in August 1929. “By then, production had already declined, and unemployment had risen, leaving stocks in great excess of their real value. Among the other causes of the 1929 stock market crash were low wages, the proliferation of debt, a struggling agricultural sector and an excess of large bank loans that could not be liquidated1.”

Here’s a comparison of the previous historical market crashes to the crash last year induced by COVID-19 (graph on the left):



The crash last year did not seem severe until their timelines are lined up (graph on the right). The stock market last year fell about 30% within a month, whereas the other crashes took place generally over many months. It was only when the Fed announced that there would be “unlimited QE” on 23rd Mar 2020 that the market turned around from the plunge.

The following is an illustration of what would happen to a 100% equities portfolio (with no allocation or hedging done) during The Great Depression in 1934 and a portfolio with asset allocation. The 100% portfolio suffered a worse drawdown (red box) and when the equities did recover, 20 years later, the portfolio was still worse off compared to the portfolio with Asset Allocation (green box). Asset classes such as gold and bonds usually do well during periods of inflation and deflation, respectively, and serve as effective hedges for the portfolio.



What Asset Selection has done for Unicorn:

On top of Asset Allocation, Asset Selection is also imperative. After researching into the sectors and the companies that Unicorn thought would continue to do well in 2020 – we switched our equities to focus on structural growth companies in tech and healthcare. As we believe China to be a long-term winner, we continued our buy into China. These selections resulted in our overall performance of 18.9% for our cash portfolio last year.



The following (blue box) is an illustration of the results of a portfolio with dynamic asset allocation, where we overweigh into quality assets when deep attractive value presents itself after a big price decline.



How do we assess which Asset Classes to hold in the portfolio?

Before we could allocate the asset classes within the portfolio, we must understand the current environment that we are in:

1. Era of US Stimulus (read cheap money) – prior to the Subprime Crisis, the Federal Reserve’s balance sheet was US$900B in 2008. That amount last month was already US$7.59T2, with a sharp rise last year. And this amount does not include the US$1.9T stimulus bill that was just passed on 10th March.



And because there is a lot of cheap money, loans come with very low interest, and it has also caused funds to flow to investments that could garner a quick return. In fact, a “staggering” record $68.3 billion had flowed into equity funds since mid-March3 as stimulus cheques were being deposited.

2. Speculation is rife – GameStop, AMC Entertainment, and QuantumScape are some good examples. Even though their share prices skyrocketed, their businesses are either in terrible positions, or even revenue-free (in the case of QuantumScape)! There is no basis nor track record of a robust business.

The share prices move on “the basis of momentum — simply put, the shares go up or down4 because retail investors don’t want to be left behind .”

Given the above, the Asset Allocation position we are comfortable with is the middle path.

Keeping excessive cash long term would only cause our assets to be depleted by inflation. Keeping excessive equities may result in violent fluctuations in our portfolio should the speculative froth from the equities market reverse itself. Money is never lost, but transferred between different asset classes. Hence a portfolio with dynamic asset allocation gives us the best assurance of keeping our assets safe, while making good returns over time.

This is our view of the asset classes and their allocation in the current environment:



Thus, if your portfolio has done very well in 2020, please also assess that it is one with asset allocation. Without it, your gains could very well have come from having no downside protection (no hedging) at all.

So, if the stock market crashes, all the gains or more could be lost.

If you think you might have a portfolio that is not properly allocated or not sure of which asset classes to select, do speak to your Unicorn Consultant if you would like know more or have further queries.

Note: We had increased the frequency of our communication with you during turbulent times. We will continue to communicate monthly with you during usual times.



  2. US Federal Reserve

  3. Barron’s

  4. Forbes


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