Author: Leif Eriksen
Covestor model: Performance With Protection, Global Growth Brands
All that for this? Just like a roller coaster, the 2011 stock market took us on a stomach churning ride and then dumped us at just about the same spot we got on. Better to have taken an extended vacation on a desert island and forgotten about the market! Personally, I take solace in the fact that the average professional hedge fund manager failed to generate a positive return for their own clients in 2011 (see “Volatility Minces Returns”, Barron’s, December 24, 2011). And those of you tracking my Covestor models can take solace knowing you fared better than many of these hedge fund clients… at a much lower cost!
The 2011 performance of my two Covestor models varied. The more conservative Performance with Protection model lagged the S&P 500 slightly while my more aggressive Global Growth Brands model significantly outperformed both its benchmark [W1DOW] and the other major indexes since its inception (February 2011). I’m very happy with the Global Growth Brands model’s performance and slightly disappointed with the Performance with Protection model’s performance. Mostly I’m relieved that I weathered 2011 with my capital still intact and some lessons learned.
No changes will be made in my approach to the Global Growth Brands model in 2012. I will continue to focus on a handful of stocks with strong growth profiles and significant share price upside while managing risk by varying my cash position. I will look at factors such as macroeconomic trends, business models, and insider buying. I will be aggressive in dumping my losers and won’t hesitate to take profits on winners. Notable successes in 2011 were CTCT, HAIN, IACI (closed out), and INT (closed out). Investments which came up short of expectations included HMC, IDCC, LPX, and NEM (all closed out). Primary 2011 lesson: In a volatile market, entry points and exit points are critical.
Changes will be made in my approach to the Performance with Protection model in 2012. I’m going to reduce the number of individual positions I hold in the account and use ETFs more often. As 2011 made clear, it’s tough to pick 20 high conviction stocks in uncertain economic times. And I expect the global economy will continue to face significant headwinds in 2012. I will continue to buy and hold the stocks of companies I believe will do well regardless of the macroeconomic climate (high conviction stocks) but I will shed positions more sensitive to the economy. And I will use ETFs to take advantage of what I perceive are macroeconomic imbalances. Notable successes in 2011 include AAPL, ATHR (Qualcomm bought Atheros in May), ENDP, GOOG, INTC, JEF, OXY, and QCOM. Investments which came up short of expectations include AMSC, BRKB, DOV, GLW, HUN, ITW, L, and TEVA (most closed out). Primary 2011 lesson: A conservative company does not equal a safe investment, particularly in uncertain times.
I expect the investment climate to continue to be challenging in 2012. The European Union will not extricate itself out of its debt predicament anytime soon. The choices are stark and the prospects for the Euro itself are bleak. As a result,I have taken out a small hedge against further Eurozone contagion by shorting the Euro through the EUO ETF in the Performance with Protection model. I’m mildly bullish about U.S. economic prospects (assuming something short of a major meltdown in Europe). I’m also bullish on emerging markets and will likely take a position in emerging market ETFs early in the year. Inflation is always a risk, but the deflationary effects of U.S./European deleveraging are currently holding it at bay. As for gold, quite frankly, I don’t even pretend to know its next move. I will be avoiding it unless I see signs of runaway inflation.
My overall investment themes of aging U.S./European/Japanese populations, an expanding global middle class, and a growing use of technology are still intact. This philosophy is reflected in a current Performance with Protection portfolio that is heavily weighted towards technology, energy/resources, and healthcare (17 of 20 positions). Technology was the biggest positive contributor to Performance with Protection model performance in 2011, but I expect the other two sectors to contribute more in 2012.
The current Global Growth Brands portfolio is more opportunistic, with a heavy weighting towards global stocks (DIS, H, HAIN, HBI, and RCL) that I expect to benefit from the expanding global middle class. The 30% cash position reflects ongoing economic uncertainty; it will likely vary over the course of the year.
Until next time many happy returns!
