I've had a tough time keeping up with reader questions. I'll knock a few out here but don't want to turn this into a 2000 word post either.One reader noted that out of concern for a toppy market he has replaced some portion of his portfolio with call options, an ETF substitution type of trade. He noted that options are cheap.
While this is not bad it is not for everyone either. He gives up dividends but these could be offset by the amount of cash he is now earning interest on. One thing that could happen here is that if the market does correct more than say 10% it is likely that his equity exposure will decrease as a function of delta reducing.
If you buy an option with a delta of 0.95 you have a good proxy for the underlying. If the delta drops to 0.60 (a 0.95 delta usually goes with a deep in the money option) you now have less exposure. So then do you want to actively manage this?
Back to the Serrapere article. A reader asks for some elaboration on John's Portfolio A along with a specific question about low quality and high quality. How do you know when to rotate between the two.
The second part is easier to answer. I do this but I think tangibly about volatility as opposed to quality. The two overlap a lot in this context and I think volatility is easier to think about. In November I disclosed selling BP in favor of WisdomTree Energy. There were two motivations for this trade. I did not think BP justified the extra risk of holding an individual name and I also thought that based on how crude looked it might be wise to reduce volatility. Almost by definition a stock will be more volatile than a sector fund, almost.
To the dissection of Portfolio A in the article; this will be more difficult as some of the article is tough to read and I can't glean exact percentages. First he is short Rydex Equal Weight S&P 500 (RSP), Nasdaq 100 with an inverse fund and short iShares Emerging Market (EEM). So I take these positions to mean that he thinks smaller and more volatile parts of the market will lag more boring parts of the market like the two health care funds, telecom fund and staples fund he is long. He is in the bomb shelter a little bit with streetTRACKS Gold (GLD, client holding) and the GDX mining ETF.
He likes energy and Japan with two ETFs each. He is long Templeton Emerging Market Income (GIM, a couple of clients own that one) yet short EEM. Liking energy would seem to be at odds, sort of, with being short EEM. Chindia needing more oil is a leg in the energy bull stool. He also has two CEFs that have big yields and fairly low volatility. Ooh, I forgot about the Currency Harvest ETF (DBV) which is a kind of absolute return play similar to the results sought after by the two CEFs.
There are some obvious questions I would have about this mix but I have to note that this is quite sophisticated and I believe is going for an absolute return and not a relative return but I could be wrong about that. First he has two health are products, PPH and VHT. I am not sure why both are necessary as the overlap is extensive and the correlation is 0.844 (according to PortfolioScience). I also am puzzled by owning OIH and XLE the holdings are not similar but the correlation is 0.939.
Further there are many parts of the market that are missing or are too small to influence the portfolio like utilities, discretionary, financials (this sector is in the two Japan ETFs but not sure their weighting in the portfolio), tech or industrials (this sector is in the two Japan funds too).
The foreign exposure seems quite limited as well.
Pretending for a moment I have dissected this correctly you need to have an element of real science embedded into your DNA to implement this on your own. This could be a great mix but it is not simple even if it appears like it is simple. There are a lot of effects and heavy mental lifting underneath the surface here. Perhaps you can wrap your hand around this or maybe not but if you think it is simple you are very likely not getting it all. I'm not being condescending; I don't think I get it all.
A couple of personal items. As I made this week's video Tater (big dog) and Cappi were asleep at my feet.We took our pack test (3 miles in 45 minutes carrying 45 lbs of weight) for Walker Fire on Saturday, always glad to have that behind me.
Last night my neighbor and I went to see the Arizona Sundogs smoke the Odessa Jackalopes. Not exactly old time hockey but it was fun. The hockey was pretty good and the fans were really into it but I have a tough time philosophically booing a 19 year old kid pursuing his dream.
10 comments:
Dog blogging!
Wow. I too have a lab mix (80 lbs.) and a little terrier (16 lbs.). They don't get along quite so well, though...
Yeah, the Serrapere porfolio seems to have a lot of moving parts imo. He obviously puts a ton of thought into his portfolio construction.
Btw, you've mentioned Portfolio Science in a number of posts. Apparently their market is exclusively professional money managers. Also, there isn't any pricing info on their site. Do you think the cost of this service is affordable for most individual investors?
On the PortfolioScience home page in the lower right hand corner is a link to what I think is called Risk API and it is intended for individual investors. This is what i use and it costs $180 per year. Some will no doubt be turned off by that amount and some will be ok with it. I will say that some of the numbers I get from their don't quite seem right but obviously I cannot know.
roger, heck no, I don't think serrapere's portfolio is simple, (i originally posed the question and thaks for dipping into it. personally, i have a push pull feel toward these articles. The pull is wanting to do it better and to be open to innovative products; frankly, the push is that some "experts" are more dressed in mystique and complexity than??. A better written article would lay out underlying assumptions, risks, caveats and mathematical tools upon which this stuff relies. In the end, perhaps just advertisement. IU has an editorial staff, though, that I greatly respect for more straight talk, as I think many here have for our host. ps Ohh do I miss my lab, our walks and river canoe trips.
Interesting portfolio, but short of involvement with foreign stocks, which would seem prudent given doubts about the FX prospects for the dollar. Even S&P index stocks still get half their earnings in US$. Foreign economic growth rates are almost uniformly higher than US growth rates (GDP) recently, and for immediate future.
I've had GIM before, but yield is low while quality of holdings is a bit higher than others. Hold FAX and GHI right now, both pay abt 8.3%, with foreign currency exposure. Have GLD and DBP for bunker insurance, though not too much.
Energy is another area where I quit XLE in favor of foreign energy companies in a loose index.
Went long Turkey TKF and Japan DNL equity funds, may try a few more but am more inclined to either short EEM as did porfolio, or use UVPIX, which is an ultra short EM fund but not an ETF (yet.) Quite nervous about some triggering event hitting EM markets.
US market is very hard to predict, with so much money sloshing around, but I went short XHB recently on speculation of housing deterioration getting worse. If I decide US market will continue meltup, might try SSO to get ultra long benefits while conserving cash. Or might go with non-US blue chips DOO of 100 top dividend payers.
Thanks for displaying a sample of a pro's portfolio. Good defense is good offense, sometimes. OldVet
old vet, thank you for the detail.
OT.
Robert Adler, the true hero of all men and a great generator of cash for the electronics industry has passed away.
A monent of silence folks...
(and pass the chips please)
http://hosted.ap.org/dynamic/stories/O/OBIT_ADLER?SITE=PAGRE&SECTION=US&TEMPLATE=DEFAULT
Back testing only has one flaw. It is not guaranteed to work in the future. Some testy sceptics would call it pseudo-science.
I, on the other hand, give the technical pros who spend much of their lifetime trying to achieve Alpha nirvana the benefit of a large, well-founded doubt. At the moment.
Nice canine pic. We have a pure bred Lab and love him dearly. He has only one weakness: small dogs. grrrrrrrr
Darling picture. I read something recently (Slate?) about how smart and effective parasites dogs are. I hadn't really thought about it that way. I've got three (english setter, poodle, American b-d mix)having laid the oldest, Lucy, to rest on 01.06.07. She would have been 14 in May. I sure don't mind them being parasites, but I sure hate having to see them transition.
I DO LOVE Monday's--the hour of Bauer!
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