Ineffective government policy and a lack of clarity on the direction of the economy make the case for a defensive investment strategy, according to Cleo Chang, manager of the Direxion/Wilshire Dynamic Fund Ticker:(DXDWX).
“There are a lot of issues facing the economy right now, but it’s not a Fed issue, it’s a Washington issue,” she said.
The strong earnings reports over the past few quarters cannot continue, she said, unless companies can increase revenues, which will require more support from consumers.
“The lack of jobs and lack of confidence has led to consumers not spending,” Ms. Chang said, citing the lack of lending by banks as part of the problem.
“The government provided banks with money to lend but it didn’t require the banks to lend it out,” she said. “The government was effective in the first part of its plan in getting the money to the banks; now they need to find a way to execute the second half of the plan by getting that money to small businesses and individuals.”
Ms. Chang drew parallels between the current state of the U.S. economy and the extended deflationary period in Japan.
“Companies are sitting on cash and banks are not lending, and the consumer doesn’t seem to be there to support top-line growth,” she said. “If we’re in a deflationary environment, it will become even more difficult for government policy to be effective, because if people think things are just going to get cheaper, they will wait to spend money.”
Ms. Chang has positioned her fund’s balanced portfolio with a 50% allocation to equities and 50% allocation to various fixed-income instruments, including a 5% weighting in cash equivalents.
In a normal market cycle, Ms. Chang said the fund would be 60% stocks and 40% bonds, with no cash.
The current allocation of the fund has a 0.9 beta to the market, or 10% off neutral. “For a balanced portfolio to be 10% off neutral is significant,” she said.
The fund is designed to adjust market beta, or correlation, in sync with market volatility. At times of high volatility, like now, Ms. Chang reduces the beta. In a low-volatility market, the fund might have a 70% allocation to equities and 30% to bonds.
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