It’s been a while since we last corresponded. I hope you and your family are well.
Quick investment question. Given the sharp run-up in equities and stretched valuations, how are you positioning your portfolio?
Roubaix Composite February 2021 Net Return +7.87%; YTD Net Return +11.34%
The February 2021 monthly tearsheet for the Roubaix Fund Composite, a fundamental long/short equity strategy focused on small and mid cap U.S. stocks. Q4 2020 hedge fund letters, conferences and more Roubaix Composite Performance Roubaix generated a net return of +7.87% in February relative to the long-only benchmark Russell 2000 Index total return of +6.23% Read More
This in a market that seemingly doesn’t go down, where the risk of being cautious is missing out on big gains.
In my portfolio, I’m carrying extra cash and moving fairly aggressively into gold. Also, on the fixed income side, I’ve been selling HY [DM: High Yield, aka “Junk”] bonds, shortening duration, and buying floating rate bank loans.
Please let me know your thoughts.
Good to hear from you. It has been a long time.
Asset allocation is always a marriage between time horizon (when is the money needed for spending?) and expected returns, with some adjustment for risk. I suspect that you are like me, and play for a longer horizon.
I’m at my lowest equity allocation in 17 years. I am at 65% in equities. If the market goes up another 4-5%, I am planning on peeling of 25% of that to go into high quality bonds. Another 20% will go if the market rises 10% from here. At present, the S&P 500 offers returns of just 3.4%/year for the next ten years unadjusted for inflation. That’s at the 95th percentile, and reflects valuations of the dot-com bubble, should we rise that far.
The stocks that I do have are heading in three directions: safer, cyclical and foreign. I’m at my highest level for foreign stocks, and the companies all have strong balance sheets. A few are cyclicals, and may benefit if commodities rise.
The only thing that gives me pause regarding dropping my stock percentage is that a lot of “friends” are doing it. That said, a lot of broad market and growth investors are making “new era” arguments. That gives me more comfort about this. Even if the FAANG stocks continue to do well, it does not mean that stocks as a whole will do well. The overall productivity of risk assets is not rising. People are looking through the rearview mirror, not the windshield, at asset returns.
I can endorse some gold, even though it does nothing. Nothing would have been a good posture back in the dot-com bubble, or the financial crisis. Commodities are undervalued at present. I can also endorse long Treasuries, because I am not certain that inflation will run in this environment. When economies are heavily indebted they tend not to inflate, except as a last resort. (The wealthy want to protect their claims against the economy. The Fed generally helps the wealthy. Those on the FOMC are all wealthy.)
I also hold more cash than normal. The three of them, gold, cash and long Treasury bonds form a good hedge together against most bad situations.
The banks are in good shape, so the coming troubles should not be as great as during the financial crisis, as long as nothing bizarre is going on in the repo markets.
That said, I would be careful about bank debt. Be careful about the covenants on the bank debt; it is not as safe as it once was. I don’t own any now.
Aside from that, I think you are on the right track. The most important question is how much you have invested in risk assets. Prudent investors should be heading lower as the market rises. It is either not a new era, or, it is always a new era. Build up your supply of safe assets. That is the main idea. Preserve capital for another day when risk assets offer better opportunities.
Thanks for writing. If you ever make it to Charm City or Babylon, let me know, and we can have lunch together.