The Aggressive Portfolio with Sector Bets

by Wes Bridel on May 2, 2011

in Stewardship

The Aggressive Portfolio takes a stand! The previous portfolios we’ve looked at have been a little more hedged.  Today, we’ll look at another option…

Jacob is a single guy in his late 30’s.  He’s watched the ups and downs of the markets with fascination over the years and has begun to study more and more how markets and economies change over time.  He by no means thinks he’s got it all figured out, but at the same time, certain themes just seem to make sense and he wants to put his money where his brain is.  He believes that the period of US domination has come to an end and that a more global perspective is needed.  Specifically, he sees how the US Government has spent decades spending more money than they bring in and the way it has in recent years ramped this spending up to insane levels while magnifying this problem by printing as many Dollars as they feel like they need.

Based on this thinking, Jacob designed “The Aggressive Sector Better Portfolio” to aggressively select the sectors of the economy which he believes will do well in the coming decade.  He wants to be diversified as much as possible, but he doesn’t want to diversify too much into areas that he think probably won’t do well in the years ahead.

Jacob knows that the market is renowned for making fools of people, so he doesn’t want to mess with the portfolio much after he sets it.  He doesn’t want to be a trader, he simply wants to find the areas of the market which he believes will offer the best diversification for safety while still aggressively trying to pick the winners of the next decade.  He’ll of course rebalance periodically and plans to do so every 18 months.  If he becomes aware of any new trends that he feels must change his allocation, he’ll do that, but he won’t’ fidget with his funds.

Let’s look at what he put together…

8%

US Equity

15%

US Bonds

14%

Emerging Equity

10%

Emerging Bonds

12%

Gold & Silver Miners

11%

Energy Producers

3%

Food Producers

10%

Gold & Silver

5%

Other Commodities

2%

Global Equity

10%

Short Fund

Jacob is obviously not afraid to spread his money across many sectors of the economy!  However, if you look closely at his diversification, you’ll notice that he is actually not what the typical financial advisor would call “diversified”.  Jacob believes that certain sectors are primed to explode in the coming decades while others will suffer massive volatility.  So he does not want to diversify large sums of his money into sectors that he believes are likely to drop in value.  At the same time, he does want to diversify enough so that when one of his favorite sectors suffers a fall, it won’t hurt him too badly.

Jacob does not feel great about the prospects of the US economy or the US Dollar over the next decade.  At the same time, he does want to be as diversified as he can in case he’s wrong.  He chose to go with his US Equity and US Bond positions because they felt like the safest positions within these sectors.  His bond funds included one that gave the manager flexibility to diversify outside of US Bonds to some degree and one that held bonds that would dramatically increase in value if inflation rose substantially.  His equity positions felt like the safest he could come by in US stocks because one focuses on high dividend paying companies, one specifically on high yielding utilities, and one is in the hands of a legendary value manager who should be able to find hidden value in any environment.

Along the same line of thinking, Jacob also had a small position in Global Equities which consists of the largest companies in the world, half of which are US based.  Like the two positions above, Jacob doesn’t feel like this will be a high flyer, but does feel that over the long term, it should outpace inflation.

These positions constitute 25% of Jacob’s portfolio and he feels that they will provide some stability and counterweight to the rest of his positions.  Each one of the following positions are targeted speculations on an asset class that he feels will outperform over the coming decade even if they are surely to be very volatile.  He knows that this will give him a wilder ride, but hopes that all of his positions will not all move in tandem and thus might provide some modicum of diversification and thus stability.

Jacob’s Emerging Market Bond position looks to take advantage of the theme of parity across the world’s countries.  The bonds in this fund are loaned to up and coming countries.  As such they pay a higher yield than US companies and are diversified outside the US Dollar in case it tanks.  He also hopes that they will provide more stability than the equity portion of his portfolio although he knows that emerging market bonds will be much more volatile than US bonds.

Gold and Silver Miners provide leverage on the price movement of each metal and since Jacob feels that these will go through the roof in the coming decade, he wants a substantial holding here on top of his foundation of trust secured gold and silver bullion.  He’s trying to get the best combination of safety and growth even within this aggressive sector, so he holds a fund of large gold miners and junior miners which he hopes will have big finds or be bought out by the majors and provide big upside.  For a similar reason, he holds the silver miner fund, thinking that silver will outperform gold even though it will have a funny see saw way of getting there.

Since Jacob believes that energy will be an important theme in the coming decade as more and more of the world approaches the energy usage of the US, he wants to own the energy producers who get paid taking the raw materials out of the ground.  He’s tried to diversify within this sector (which again is not overall diversification by any means) by owning large producers and a Canadian energy fund which he thinks will do well because of the oil sands while also liking the fact that it pays a nice dividend.  Finally, he holds an MLP focused fund in order to get some large energy produced income checks.

Nothing is more important than food, and just as Jacob sees an increasing demand for energy, he believes there will be a hungrier and hungrier population longing for better food.  Food producers deserve a spot in his portfolio for just this reason!

While it is somewhat repetitive, Jacob wants to add a little more commodity producer exposure so he chooses a fund that allows management to rebalance among the above commodities as well as others not specifically selected.

Finally, Jacob feels like having a short fund will provide some nice hedging and counterbalance to the long positions in the portfolio.  It will be nice to have SOMETHING going up if everything else is going down!  He chose a C share version of this fund because he doesn’t know that he would hold it more than a couple years.

These portfolios are actually very similar in philosophy to the last portfolio we discussed with several large differences.  They both have some level of diversification into opposing asset classes while still leaning towards profiting from a perceived opportunity in the areas of gold, silver, and foreign markets.  However, Jacob is far more specific in his holdings, and also more aggressive by having larger holdings in the areas which he thinks will do well and smaller holdings in the areas which he feels will stabilize his portfolio.  Only time will tell, which one will outperform the other, but each has chosen a portfolio that specifically reflects their beliefs in the markets and the ways in which they feel the Lord is leading them to steward what He’s given them.

This is Part 3 in a series on Real Life Examples of Portfolio Management.  You can read the previous posts at: Pt 1 & Pt 2.  We just finished a series on the different types of investors which you might want to check out at the following links:  Pt 1, Pt 2, Pt 3, Pt 4, Pt 5, & Pt 6.

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