The stock market has become rich with too much “frothy optimistic sentiment,” which is not good for equities, according to David Wright, manager of the $560 million Sierra Core Retirement Fund Ticker:(SIRAX).
The fund, which invests in exchange-traded funds and open-end mutual funds, has a sparse 10% weighting in domestic equities but maintains a broadly diversified bond allocation.
“It is not normal for us to be this low in equities, but we think the global markets are probably in the process of turning downward for a multimonth or even multiquarter period,” Mr. Wright said. “We don't think the S&P 500 has another 15% upside; the next 15% move will be down.”
Mr. Wright, a managing director of Sierra Investment Management Inc., has been heading the quantitative strategy for 20 years, but the mutual fund version was launched in December 2007.
“We are tactical and we look at dozens of asset classes,” he said. “There is no fixed asset allocation, and I never bought in to modern portfolio theory.”
The strategy relies on moving averages and other trend patterns to determine how to allocate assets. Sell decisions are typically set to specific loss signals and limits.
The fund, which enjoys broad flexibility to invest across multiple asset classes, has an almost 50% weighting in fixed income, including an 8% allocation to municipal bonds.
“Muni bonds have the most potential of any bond category right now,” Mr. Wright said. “They were punished by the [recent] emotional sell-off, but they are already up 3% off the lows and we expect a 6% to 8% total return from muni bonds over the next three or four months.”
The fund has just 2.5% allocated to commodities, but Mr. Wright plans to increase that allocation with new inflows as well as from the 6% he has sitting in cash.
“Right now, we're sort of hoarding cash, waiting for the dollar to turn up,” he said.
The fund is currently positioned for a rising dollar, a recovery by muni bonds and rallies by commodities and high-grade bonds.
The list of equity risks is long, according to Mr. Wright.
“The economy will soften with the [upcoming] end of quantitative easing, and corporate earnings comparisons will start to disappoint investors,” he said. “Plus, the real estate sector is going to be down another 8%, and all this means we could be in a formal recession by the end of the year.”
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