Manager: Vista Investment Management
Model: Core Holding
A central investment tenet is that diversification can reduce portfolio risk without detracting from returns. There are many ways for equity investors to diversify – for example, by industry, by size of company (large and small caps), by investment style (growth and value), by geographic exposure, and by number of positions.
The Core Equity style employed by Vista Investment Management is highly diversified with over 30 holdings and exposure to all major market sectors. The goal of this portfolio is to produce returns in excess of the S&P 500 Index, with risk that is approximately equal to this index.
While there are no big bets in the portfolio (all positions are less than 4% of the total portfolio), there are few sectors that are better represented, as we consider them at present to have above-average future return potential.
The portfolio currently has 28% exposure to international equities, with 22% invested in emerging market equities (7 positions). Rapid earnings growth combined with recent price weakness have made emerging markets attractive from both a growth and value perspective. For example, emerging markets are expected to produce GDP growth of 6.5% for 2011, versus 2.4% for advanced economies.
Despite a higher growth outlook, emerging markets sell at a discount to developed markets on a P/E basis. The MSCI Emerging Markets Index has a forward price/earnings ratio of 12.4, compared to 14.3 for the S&P 500 Index (as of 4/30).
The portfolio currently has 43% exposure to US large caps and 24% to US mid and small caps. Within domestic equities, there is a slight over-exposure to technology companies. The primary attractive features of this industry are good growth potential, clean balance sheets and reasonable valuations.
IMF Data Mapper, as of 5/17/11 http://www.imf.org/external/datamapper/index.php
Morningstar data for EEM and SPY P/E ratios, as of 4/30/11 http://portfolios.morningstar.com/fund/summary?t=EEM and http://portfolios.morningstar.com/fund/summary?t=SPY®ion=USA