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A Few Strategy Changes

This update is more of an FYI piece regarding two of our strategies, specifically the New Power Strategy and the Foundations strategy. The intention is to provide a little real time education and insights into our systems and how we adapt to market conditions.


New Power


For those who have been involved since the beginning, you know that the title of this strategy is probably a misnomer, at least since 2012. At that time, late in the year, it became obvious to us that our original design and scope of the New Power was too narrowly focused on clean energy and clean technologies. The Ah Ha moment came when we recognized that the massive disruptions and “game changing” events happening in the energy complex were also happening in other industries. The world had become a very dynamic place at least from an investment perspective. In late 2012, we effectively split the portfolio in two. One half would remain committed to the energy revolution which includes transportation, and efficient building as wells as companies that are providing solutions to global resource scarcity. The other half was committed to companies from multiple sectors that are acting as pioneers in their industries (like Tesla), those who are facilitating consumer trends (like Amazon) or Integrating people and businesses (Linked In and Facebook). Here we see a lot of technology companies, relatively new public companies or those who are gobbling up market share through their attractive enterprises. New Power is, and has been, a Game Changers’ portfolio of stocks across all major industry groups.


The recent changes we are making are specifically to take positions in Chinese technology stocks (Baidu, Alibaba, Sina and Enersys so far). This process started in early October and continues today. Yes, we see the risks but there are several realities that we believe make this an attractive place to take small positions. First, we have seen the Chinese stock market as a whole correct nearly 32% in only six months. Prior to the correction, their markets were leading the world, outperforming most developed and undeveloped markets for the previous three years. Economically, China has been getting weaker, slowing to right around 6% annually. 6% ! Which country in the world is growing at even 1/3 of that rate? Zero is the answer. A hard landing does not seem likely to us and there is the real possibility that their stock markets are already building a constructive pattern for a new bull market. Second, we have Chinese demographics. China is home to one of the world’s largest populations… of young people. They are in the front end of their lives, gathering steam, spending money, building cities and infrastructure, generating income and for the first time in the country’s history, we are seeing the emergence of a middle class. I think it’s common knowledge that the US and most other developed countries are literally in the opposite situation on all fronts. As such, China’s share of global GDP continues to climb even through the recent “slowdown”. Finally, we have the final reality that the new and emerging Chinese middle class is going to behave much as we have in the last twenty years embracing companies like Apple, Amazon, Google, etc. China has their own local versions of these companies and these are the names we are buying as most are trading at deep discounts. Ironically, last week we reduced our position sizes in Amazon and Facebook back to their original investments as both have nearly doubled since purchase. We still love both names but have a little fear of heights given the recent moves.


From a portfolio allocation perspective, New Power can be a part of any portfolio as long as it doesn’t represent more than 10-15% of the total. In fact, for our younger clients with longer time horizons, I will recommend an allocation to New Power anytime. The volatility in this strategy is large but the intention is to generate commensurate returns over time. Personally, I have added to my New Power strategy account as I see the opportunity and like the focus of these investments.




Our “Foundations” strategy is designed to be our most cost effective and probably most traditional investment portfolio offering. It invests in very low cost ETFs and index funds and employs a slower investment allocation approach using a blend of asset classes. Boring!, you might say. Sometimes boring works quite well and in fact this is one of those years. Foundations is tracking most of the broad stock indices nicely and doing so with almost 1/3 lower volatility. It also has a bear market safety mechanism that you won’t find in the typical passive asset allocation model – which you can do easily on your own. The safety mechanism is the same system that governs all of our investments strategies (Net exposure, Selection and Position sizing). All three of these criteria are at play in the Foundations model. Today we have made a change to the asset allocation mix using these criteria.


For the last three years, Foundations has carried little to no exposure in commodities. Commodities have been losing ground nearly every week since late 2012 making 12-15 year new lows in price in the last couple months. We are not yet ready to buy commodities aggressively but the environment is looking more and more attractive as a bottom potentially develops. Energy may have bottomed already. The important thing we are doing now is carving out some space in the portfolio for these types of positions. Commodities are similar to real estate in that both offer investors one of the few remaining sources of true asset class diversification. Treasury Bonds are done in serving that role. Our new carved out section of Foundations represents a total of 20% of assets with 10% available for real estate and 10% available for commodities. These are simply maximum guidelines and do not mandate full exposure at any time.


What we often see in our industry is a lot of rear view decision making. Every week, I am now seeing mutual funds and closed end funds in the emerging markets and commodities space, close permanently. Investors are giving up in these areas looking only at returns over the last three to five years and yanking their money - after realizing huge losses. Goldman Sachs has just shuttered their BRIC fund (Brazil, Russia, India and China). I won’t be surprise in the least if these are the leaders of 2016. Foundations already has a 30% allocation to World stock index funds, maybe we’ll find ourselves rotating into more international indices next year, as these have been the laggards in 2015. The final allocation for Foundations now looks like this:


30% World Stock Indices (The “world” includes the U.S.)

25% Sector Funds

10% Real Estate

10% Commodities

25% Tactical High Yield Bonds


That’s it for this week, just a little housekeeping with some embedded investor education. Big snow up here in Steamboat Springs, come and get it.



Sam Jones