The last few months have been extremely busy for Dave and I as we have had very little time to take to the monthly newsletter. Going forward, we are going to move from a monthly to a quarterly release. We are all overloaded with emails in our daily lives and less is often best.
I hope everyone is having a great spring. As we wait for the last remnants of winter to give way to green grass and warmer temperatures it would appear that the markets have also taken on a spring outlook. The general sentiment is that contagion fears with the Asian economic slowdown, as well as the steep fall in oil prices have demonstrated a minimal effect on the US Economy. Recent employment reports over the past 6-8 months have been very encouraging. Housing, production, and inflation have all been consistent with a stable economy. That said, it only takes a few data points to get market participants’ nerves on edge, so we will be watching for those situations as potential opportunities for our clients.
While there still remains some downside risk to the markets and the economy as a whole we feel that we can now safely deploy assets in a less defensive manner than we have done over the past 6-8 months. We have begun to move assets out of cash and into our Core and Non-Core Investment allocations as appropriate for each clients’ portfolios. Beyond our Core Fixed Income and Equity allocations we feel that opportunities exist once again in sectors that still remain in a bear market. These include second tier EU Countries, Emerging Markets, Small Caps, Health Care and Energy. We continue to be very selective in these areas but will take advantage of these opportunities as they present themselves where appropriate.
At CRA we continue to focus on building individual custom portfolios based on a client’s age, risk profile and liquidity needs. One critical component of every portfolio is the ability to re-balance and overweight by an individual sector based on market opportunities as they present themselves. Currently, a number of sectors look inexpensive when compared to the broader market. These sectors often represent a great opportunity to capture an upside movement in price appreciation over a set time period. Using individual ETF’s is a great strategic tool to take advantage of these sector opportunities. A few sectors that we currently like going into Q3 and Q4 are as follows:
Oil and Gas. While this holding may bring anxiety to mind when recalling what happened to energy investors in 2014 and 2015 it is important to understand a few important factors. One, the oil and gas market has stabilized in 2016. YTD Oil has returned +5.75% and much in sync to the broader energy markets.However, on a one year basis oil is still down -27.95%. Given how far the energy markets have fallen and how they have recently stabilized we feel it is a good time to dollar cost into the oil and gas sector for a small portion of a portfolio using sector specific ETF’s.
Global Materials (MXI).The largest corporate holdings in the materials ETF is DOW Chemical, Du Pont and Monsanto. MXI has a 12 month trailing yield of 3.44% and YTD the fund is up +11.51%. The story here represents the beginning of the year fears of a global slowdown in China as well as other emerging economies. While these contagion fears have some validity going forward the economic numbers and data indicators behind the fear eventually proved to be inconclusive. While MXI is still down over -10% on a 52 week basis we believe it has room for significant price appreciation due to the sharp sell off late in 2015. The chart below represents the 1 year price movement on the ETF.
Russell 2000 Growth. This ETF is a core holding represented across almost all our model portfolio’s.The attraction to the overweight side follows the same story as mentioned above. A larger than normal market sell off in the beginning of the year followed by a gradual recovery. IWO holds a basket of 1,175 small cap U.S companies. The numbers are as follows: 1 Year -11.67%, 3 Years+ 8.07%, 5 Years + 7.84% and +6.05% over 10 Years.Last months performance of the fund turned significantly higher and returned an impressive +7.68%.
The historical returns of small caps over a long time period are impressive and important to keep in mind when building core blocks for any portfolio. The steep selloff over the last year in small caps and the recent price appreciation gives us reason to overweight the sector for the remainder of 2016.
At CRA our portfolio modeling is based upon our combined +30 years in the markets. Dave’s 20+ years as a portfolio manager at Oppenheimer adds significant value to our clients’ fixed-income portfolios. We have deployed a detailed process by which each of our clients are given an asset allocation template that is customized. With these customized templates we can precisely design portfolios that closely align with each client’s risk appetite and financial goals. The templates provide complete transparency and allows both CRA and our clients a comprehensive understanding of their portfolio risk weighting as well as its performance.
While the portfolio approach is easy to understand and can seem simple in nature the value of the advisory firm is our ability to fill the portfolio components with the best holdings available. This process of finding what holdings will be used and in what percentages takes up a majority of our time. As a core value of our fiduciary relationship all client holdings are based solely on the need of the client and are not subject to any outside influence.
Should you have any question on our portfolio modeling process and or any questions please feel free to reach out to us at our email below. Thanks!