My youngest son is putting grey hair on my head. He loves to do big jumps in ski terrain parks, launch huge rocks and make videos with his GoPro like every kid his age (12). Sometimes, I can’t watch. In one of his recent videos, I heard him confidently say to himself, “I’ve got this” as he was approaching a big drop. He nailed it – no problem.
We realize there is a great deal of trust involved when you hand someone your money to manage. For this update, I’m going to provide you with a detailed insight into our current positioning. The intention is to give you some peace of mind and earn that trust while it seems the financial world is crumbling. This will be especially relevant for our newer clients who haven’t had the tenure of our legacy clients.
As a reminder to all, our process in all strategies is based on three primary criteria. Net Exposure (N), Selection (S) and Position Sizing (P). One could go round and round with titles for all of this. Some would call it relative strength analysis, others might call it dynamic asset allocation or market timing. We think of it as prudent risk management with a focus on generating asymmetric results. Asymmetric results are a goal, which we state clearly in our Explicit Investing Creed nearly everywhere on-line and in print. This is a not a guarantee but a clear objective measured against an entire portfolio over a full market cycle, usually 5-6 years. Here’s how we define success:
Success (defn.) – Generating asymmetrical results across all investment strategies: to expose ourselves to return in a way that doesn't expose us commensurately to risk, and to participate in gains when the market rises to a greater extent than we participate in losses when it falls.
So let’s dive into our current positioning using N/S/P to frame the discussion
As of Friday last week, we raised our cash (money market fund) position again across almost all strategies. Today, we’re doing a little more selling as several positions are breaking stops. Remember that we have been selling to cash aggressively since last November and December in response to market conditions. Recently, we have just moderately increased that very large cash position. That’s all. At the end of today, the cash position for each of our strategies is listed below:
Holding Tank – 100% cash
Retirement Income – 83% cash
Freeway High Income – 38% + 62% muni bonds and government bonds
All Season – 46% cash
Foundations – 49% cash
Gain Keeper (Annuity) – 67% cash
Worldwide Sectors – 50% cash
High Dividend – 44% cash
New Power – 56% cash
That’s a lot of cash for any investment portfolio but under current circumstances, we can feel very confident that our client’s portfolios are NOT losing 2% / week like the stock market. Far from it. In fact, after today, our Freeway High Income strategy is likely to go positive YTD on the back of the very large bond position and several other strategies are only down 3-4% YTD while the US markets are down almost -10%. Foreign markets are approaching – 20% YTD. Total portfolio results for any of our households will of course vary depending on your specific mix and allocations to our strategies.
Our remaining holdings are generally very defensive positions, heavy in things like consumer staples, telecom, industrials, utilities, materials, low volatility index funds and select bonds. Frankly, each week in the past two months, we have lost holdings that are breaking stops, breaking long term uptrends or under heavy selling pressure. The things we have not lost yet are those that are still showing excellent relative strength, often still trading above rising moving averages, are in the right sectors or in some cases, making all time new highs like AT & T (T). Almost everything with a few exceptions is correcting down from the late 2015 price highs but rarely are they sinking like the markets. Instead, they are just down some and still trending higher. Last week I mentioned Dividend Paying ETFs as a place to consider holding some exposure. As an example, I want to highlight one ETF that we own just to show you the internal holdings and how the market is still showing strong preference for a certain type of defensive stock. That ETF is the I Shares Core High Dividend ETF (HDV). It seems to be invested in just the right place for this market and this fund is now our largest holding in our flagship All Season strategy. For compliance reasons, I cannot show you gain or loss on any one investments without showing the same for all positions so I’ll avoid that. But I will show you what is happening to the internal holdings of HDV on a day like today.
Today the market is down 2% as I write (again). At 10:00 am MST, I took this snapshot of the intraday performance of the top 10 holdings in this fund. Here’s what it looks like
5 of the top 10 holdings, which in aggregate represent more than 50% of total ETF assets, are UP today. That is just about as close to an investment magic trick as you can find while the S&P 500 is down 2% in aggregate. HDV, the ETF, is down 0.30% today by comparison. So there are still reasons to stay invested in things like HDV as money continues to flow to these specific defensive names.
Other positions that we continue to hold are those that are showing non-correlation to the stock markets of the world. Last week, we bought gold across several strategies for the first time in years. Why? Please cycle back to last week’s update for details. Gold funds are spiking higher 3-5%/ day. Of course this won’t last and gold is now wildly overbought in the short term. But for now, we look at gold as a reasonable hedge against a falling stock market and may add to these positions on a mild pullback (in Gold). We also own specialty liquid alternatives like the 361 Global Long/ Short fund and a new addition called the Direxion Managed Futures fund (bought today). Again, these positions, like gold, move to their own beat and are showing little to no correlation to the price action in the major stock indices.
This criteria addresses our conviction in any investment. When our conviction is high, we develop and hold a larger allocation to the investment. When we are just entering a new sector or dipping our toes in the water of one thing or another, our conviction is low, so our allocation is low. A large investment in any one security might be close to 10% of a strategy. As I mentioned above, HDV has that type of allocation in our All Season strategy now. A small position might be 2-3% of a strategy. Today, we are dipping our toes into the oversold industrials and materials sectors taking very small positions in companies like Cummins (2%), QCOM (2%), ETN (3%) and CHRW (3%). If these companies prove themselves in terms of expected price action for their very strong fundamentals, we will add to their “position size”. This is pretty basic 101 investing stuff but this is another one of those dials we can turn to adjust to conditions as they develop.
Hopefully, this gives you a sense that you are in good hands with adjustments happening as they should to reflect current conditions. We do not sell everything in fear and we do not buy 100% on any given day. But we do follow a well-defined process that leads to excellent results over time. We’ve got this