On February 17 at 4:30pm ET, this article was corrected to show that the return on bitcoin was -73.3%, not +73.3%, as originally reported. That changed the overall return for Yusko's predictions from +6.15% to -7.18%.
While many predict the non-consensus outperformers each year, few succeed. Among those who tried in 2018 was Mark Yusko. Would investors that heeded his advice last year have seen higher returns?
Yusko is the founder, chief investment officer and managing director of Morgan Creek Capital Management, a hedge-fund manager based in North Carolina.
In the tradition of Byron Wien, a year ago Mark Yusko identified what he believed would be the 10 biggest surprises for 2018.
In the past, Yusko has said that he typically gets seven or eight of his predictions right. But this time, Yusko only got four of his 2018 predictions right.
Let’s review his recommendations for 2018 to see how advisors would have performed if they followed his guidance by allocating to ETFs accordingly.
1. Rates won’t rise and the bond bull market will continue ✅
While the consensus was that rising rates would spell the end of the bond bull market in 2018, Yusko disagreed.
Advisors who followed his fixed income advice and kept assets allocated to the iShares 7-10 Year Treasury Bond ETF (IEF), up 0.99% in 2018, would have benefited.
Yusko also said that the Fed funds rate was reaching its peak and the Fed would not hike as often as the consensus expected, his prediction that financial conditions would stay loose was right.
Last year the Fed progressed but didn’t accelerate its quantitative tightening (QT) policy, which first began in 2015 when the Fed fund rate was set at 0.25%. In both 2017 and 2018, the Fed funds rate was boosted by three-quarters of a percent.
The Fed finished the year with a fourth rate hike in December 2018, bringing the central bank’s benchmark interest rate to 2.5%, a historic low level.
2. U.S. equities will have a bad year ✅
Yusko predicted that U.S. equities would have a bad year. They did – investors would have been well served to avoid the S&P 500.
Though stocks went up in the first half of the year, they retreated in the second and the SPDR S&P 500 ETF Trust (SPY) was down 4.56%.
Yusko predicted that if the Fed actually lowered its balance sheet in 2018, the market would react negatively. This was correct, the Fed did contract its balance sheet last year.
3. Prepare for more volatility ✅
Yusko cautioned investors to prepare for more volatility, and they would have been well served to follow this advice.
The largest volatility ETF, iPath® S&P 500 VIX ST Futures ETN (VXX) was up 67.91% in 2018,
after dropping by 72.64% in 2017 following years of negative performance.
4. Performance of FANG stocks will disappoint ❌
Yusko predicted that the performance of the FANG stocks (Facebook, Amazon, Netflix and Google) would disappoint investors. He was wrong – they did not show a loss for the year. An equally-weighted portfolio of the four FANG stocks would have been up 10% in 2018:
Morningstar 2018 Returns
AMZN 28.43%
FB -25.71
NFLX 39.44%
GOOGL -0.80%
Avg = 10%
Investors who sought broader exposure to the high-tech sector would have bought the First Trust Dow Jones Internet ETF (FDN), which owns the FANGs. It was up 6.17% for the year, though that was significantly lower than the 37.64% gains it showed in 2017.
5. The era of the dollar as the reserve currency is over ❌
Yusko claimed that the era of the dollar as the reserve currency was over and said that it was heading down. It did not; the dollar was up approximately 4.7%.
Investors who followed his advice and allocated to the Invesco DB US Dollar Index Bearish Fund (UDN) would have ended the year down 5.02%.
He predicted that the dollar would be at $90.00 (based on the DXY) by the end of the year – it closed out 2018 at $96.17.
6. Oil prices will get cheaper ✅
Yusko said that oil prices were at a short-term peak, and he told consumers that they could look forward to cheaper oil prices. He was right – the United States Oil Fund, LP (USO) was down 19.57% last year.
However, his prediction that shale would do well was wrong – the Invesco S&P SmallCap Energy ETF (PSCE) was down 42.98%.
7. Japanese stocks will do well ❌
Yusko said that investors in Japanese stocks would do well in 2018, but advisors who followed this recommendation would have suffered losses. The iShares MSCI Japan ETF (EWJ) was down 14.09% for the year.
He also incorrectly predicted that the Nikkei would hit 27,000 by the end of the year – it was down 17.02% for the year, closing out 2018 just over 20,000. Though the Nikkei soared on its first trading day of 2018, hitting a 26-year high, it had its first annual loss in seven years.
8. European equity performance will dominate for the next decade ❌
Yusko predicted that European equity performance would dominate over the next decade. The Vanguard FTSE Europe Index Fund ETF Shares (VGK) was down 14.91.
He also said “the peripheral markets are the place to be – especially Greece.” This performance prediction also proved wrong in 2018 – the Global X MSCI Greece ETF (GREK) was down 31.23%.
9. Emerging markets' decade of dominance will begin ❌
Along with Europe, Yusko said, investors should be overweighted to emerging markets. He argued that
the emerging markets could go up a lot over the next 10 years, “You can buy the emerging markets at a great discount.” But the MSCI emerging market index was down 14.58% last year.
Investors who followed his advice and allocated to the Vanguard FTSE Emerging Markets Index Fund ETF Shares (VWO) would have ended the year down 14.77%.
Yusko also said that Alibaba will be the most valuable company in the world in five years and predicted that China would be the best-performing market in 2018. This was also wrong – the iShares China Large-Cap ETF (FXI) ended the year down 13.26%.
10. Investors should own commodities ❌
Yusko said that investors should own commodities, but the two largest broad-based commodity ETNs, iShares S&P Commodity-Indexed Trust (GSG) and Dow Jones-AIG Commodity Index (DJP), were down 13.9% and 13.1% respectively.
Investors who allocated to the Invesco DB Commodity Index Tracking Fund (DBC) would have ended the year down 11.62%.
He said it was a great time to buy commodities, advising investors to “sell some stocks and buy a little gold, which is as cheap as it was in 2000.”
Following this advice would have also led to negative performance – the SPDR Gold Shares (GLD) was down 1.94%.
11. Investors should own blockchain ❌
Yusko highlighted what he saw as a bonus surprise for 2018, advising investors that they should own Bitcoin and blockchain-related investments. The consensus is that it is a bubble and a fad, he said, “But the reality is that it is really big. It is not in a bubble.”
Whether these controversial assets are in a bubble remains to be seen, but Bitcoin was down 73.3% in 2018.
How did Yusko do overall?
Yusko got only four out of his 11 predictions right. But if one were to have constructed an equally weighted portfolio to gain exposure to his 11 ideas, the return would have been -7.18%, as shown in the table below:
|
Prediction
|
Correct?
|
ETF Ticker
|
2018 Returns
|
|
1. Rates won’t rise and the bond bull market will continue
|
✓
|
IEF
|
+ 0.99%
|
|
2. U.S. equities will have a bad year
|
✓
|
SPY
|
- 4.56%
|
|
3. Prepare for more volatility
|
✓
|
VXX
|
+ 67.91%
|
|
4. Performance of FANG stocks will disappoint
|
✗
|
FANG stocks
(equally-weighted portfolio)
|
+ 10%
|
|
5. The era of the dollar as the reserve currency is over
|
✗
|
UDN
|
- 5.02%
|
|
6. Oil prices will get cheaper
|
✓
|
USO
|
- 19.57%
|
|
7. Japanese stocks will do well
|
✗
|
EWJ
|
- 14.09%
|
|
8. European equity performance will dominate for the next decade
|
✗
|
VGK
|
- 14.91%
|
|
9. Emerging markets' decade of dominance will begin
|
✗
|
VWO
|
- 14.77%
|
|
10. Investors should own commodities
|
✗
|
DBC
|
- 11.62%
|
|
11. Investors should own blockchain
|
✗
|
BTCUSD
|
- 73.3%
|
|
Average
|
4/11
|
|
-7.18%
|
Did you know that cash was the best-performing asset in 2018? Even industry leaders with the best investment track records would have been unlikely to recommend investors allocate to cash holdings for the year. While pundits will continue to try and identify the non-consensus outperformers each year, advisors would be well-served to remind clients that allocating assets to reach long-term financial goals is the most prudent way to drive portfolio performance.
Marianne Brunet is an economic analysis manager at Advisor Perspectives.
Read more articles by Marianne Brunet
