Sitting on the sidelines is a smart strategy

Author: Matthew Pierce

Covestor models: Income Portfolio, Growth Portfolio, Balanced Portfolio

It is July, do you know where your investment advisor is? If your advisor is like the rest of us, he or she tries to take time away from the office — on boats, lakes, beaches, traveling, on safari, or, in other words, probably not hovering over your portfolio allocations.

For July 2012, remaining on the sidelines wasn’t a bad strategy. The long term investor is necessarily concerned with staying the course with a stable process and investment outlook. So long as there are protections from the unanticipated potholes on the investment highway, built within the portfolio and within the investment methodology. We think that not trading the portfolio after a quarterly rebalance is the right thing to do.

So that’s what we did. After our July 2nd rebalance, which we discussed in last quarter’s commentary, we worked on our investment methodology, researched new asset categories and classes, further refined our estimation process, and worked to continue to improve our forecasting and optimization techniques.

We also spent some time away, recharging our batteries. We did not concern ourselves very much with the day-to-day movements of your portfolio, which, by the way, were up for the month from 0.6% for the Growth portfolio to 1.0% for the Income model.

Peering into our not-so-crystal ball, we continue to remain cautiously optimistic about global equity markets and expect that the on-again off-again character of the US equity market to continue for the rest of the summer, absent any major financial or geopolitical events.

The weak American economy with its attendant high unemployment, large fiscal deficits and worrisome over-reliance on consumer spending, shows some signs of further slowdown.

On the plus side, despite the weakness in the US economy and recession in Europe, many companies have quarterly earnings in line with analyst expectations, principally, we believe from managing profits through cost-cutting rather than top-line revenue growth. In addition, the stimulus policy of the Federal Reserve continues, albeit with perhaps less impact than in the past.

Once again, fixed income outperformed global equities in July. In particular, longer duration fixed income instruments and foreign (especially dollar-based emerging bonds) outperformed shorter duration fixed income in the month. Inflation protected treasury securities also did well.

Some of our desired exposures in the current portfolios continue to be relatively underweight in Europe and international markets overall, and a relative overweight in smaller capitalization equities, long term treasuries and high yield bonds. We retain a large exposure to gold and REITs which we consider good diversifying assets.

The table below reflects our composite portfolio performance for the month of July and since 12/31/2011. Returns are net of fees and transaction costs.

We measure our portfolios against an index of US fixed income investments (the BarCap Govt/Credit Index) and an equal-weighted index of Large US Stocks (Russell 1000) and non-US stocks (MSCI ACWI ex US).