More Stock Picking vs Fund Picking

GlobalTrends has a post adding to the ongoing debate about stock picking versus fund picking. Generally they come down on the side of using ETFs. My take has always been to use whatever you think is the best tool to capture whatever you want to capture. It doesn't make sense that one product/wrapper can be the single best way in to every asset class and market segment.

Obviously ETFs, maybe we should say exchange traded products, are covering more and more ground and covering it with useful products even if many of the funds never really catch on with the investing public. For a while I have expected that I will write a post one day called The Only Stock You'll Ever Need and be referring to the one part of the market still not covered by ETFs. I'm only half joking.

There are plenty of spots in the market not covered ETPs. I've been a big fan of Norway for years now. There is no ETF and I doubt there ever will be. There is the Fidelity Nordic Fund (FNORX) but that takes in at least four countries and being an open end fund you never know how much Norway you have today. While I could probably make an argument that these countries are preferable to the bigger countries in Europe, Swedish bank exposure to Latvia notwithstanding, Norway has specific attributes that I doubt the fund captures very often. Indeed the fund has lagged the OBX index at almost every turn in the last few years.

There are other potentially important, or maybe more correctly interesting, segments that ETFs may not be able to cover for a lack of stocks. A lot of the obscure market segments I have tried to explore fall under this description. I think owning a publicly traded exchange has some merit but the two ETFs that I am aware of with meaningful exposure also have a lot of investment bank (the former IBs anyway) and asset managers. These funds certainly offer differentiation from a mega cap sector fund that is top heavy with banks but if anyone wanted to go narrower they would have to buy a stock. There are ETFs with as few as 20 stocks but I do not know if there are even 20 exchange stocks.

In doing research on airports I have 14 added to a Yahoo watchlist. When I looked I found a few others that seemed to be listed but not trade (not sure what the story was) so while there may be 20 airports it would be a very difficult (read expensive) fund to run. Similar situation with toll roads. There are three in China (that I know of), several in Europe and then a bunch of strays here and there. What about Norwegian fisheries, they have skyrocketed this year. There's only four or five of them. They will skyrocket again at some point (not a near term prediction but a generic observation) and there will never be an ETF there obviously. Ditto farm stocks, one example being Black Earth Farms (BLERF).

Anyone who says investors don't need these sorts of things; I will generally concede the point. I'm not a believer in broad proclamations about what other people should or should not buy but I realize most folks are not inclined to spend the amount of time needed to choose one of these stocks.

These types of stocks allow a portfolio to look very little like the broad market which is at times exactly what is needed and why I devote any time to them. A lot of them got crushed in this bear market, so they were not an effective tool on this go around and I was lucky not own any airports or whatever. I believe the pounding that these segments took has a lot to do with the type of bear market we had. Many of the cash flow stories also have debt and need access to the debt market for capital intensive improvements and whatever else. The nature of this bear market impeded, either in reality or perception, that function thus many of the stocks were hit.

While I obviously have no way of knowing when this crisis will be solved it is a good bet that just as this bear market did not originate with excess in the tech sector the next one won't start with excessive and reckless lending into an overheated housing market.

I can't envision a scenario where I own all of these or even more than one but there is interesting potential with this. Working on the assumption that a combo of SPY, IWM and EFA will not cut it is becoming possible to build a portfolio with narrow based products capturing some very specific characteristics and precise weightings with 80-90% ETFs and then just a few stocks. For some people broad based only will always be the way and so this post is not for them. But to the extent that the investment world is evolving then the concept here could level the playing field some for people.