Author: Charles Sizemore
Covestor models: Dividend Growth, Strategic Growth Allocation, Sizemore Investment Letter, Tactical ETF
The third quarter could be summed up in two words: “Big Bazooka.”
This was a quarter that saw unprecedented monetary stimulus from the world’s three most powerful central banks. European Central Bank President Mario Draghi bought the Eurozone time to get its house in order with his announcement of potentially unlimited “outright monetary transactions” to assist any country in need, so long as that country agreed to austerity conditions.
Shortly thereafter, Fed Chairman Ben Bernanke threw gasoline on the fire by announcing “QE Infinity,” in which he promised to inject $40 billion in stimulus per month into the mortgage bond market indefinitely, meaning as long as it took for him to see improvement in the unemployment rate.
And almost as an afterthought, the Bank of Japan announced a major expansion of its own quantitative easing program, boosting it by 10 trillion yen.
As we enter the fourth quarter, this coordinated monetary attack is the single biggest bullish factor in an otherwise shaky macro environment.
U.S. investors appear content for now to ignore the elephant in the room, the infamous fiscal cliff of tax hikes and budget cuts that is slated to take effect at the beginning of 2013 barring action by Congress and approval by the President. In a heated election year, it’s hard to see them coming to much in the way of an agreement.
But the bigger worry in our view is the risk of the Eurozone slipping back into crisis. It would appear that Germany is doing everything in its power to undermine the major breakthroughs of the third quarter. Having failed to stop Mario Draghi from announcing his bond purchase plans, German Bundesbank President Jens Weidman appears to be getting his revenge by leading a charge against the plans for an EU banking union.
Meanwhile, German Finance Minister Wolfgang Shauble, along with his counterparts from the Netherlands and Finland, have now publicly opposed a bank bailout for Spain—months after a general consensus was formed about removing the “vicious circle between banks and sovereigns.”
We find these developments deeply disturbing because they erode the confidence that is so critical to a functioning capital market. They risk undoing months of progress in resolving the sovereign debt crisis, and each step backward makes the eventual disintegration of the Eurozone all the more likely.
Still, the market appears to be climbing this rather steep wall of worry, at least for now. And until we see signs of weakness, Sizemore Capital continues to believe that it makes sense to err on the side of bullishness. It is one thing to fight the Fed, but quite another to simultaneously fight the Fed, the ECB and the Bank of Japan.
For now, we remain aggressively invested. But given the macro concerns we see, we stand ready to make significant changes to our portfolios as conditions warrant.
We are pleased to say that all Sizemore Capital strategies saw positive returns though the first three quarters of 2012.
Model Portfolio 1/1/2012 – 9/30/2012
Dividend Growth *5.3%%
Tactical ETF 6.9%%
Sizemore Investment Letter 13.6%%
Strategic Growth Allocation 11.1%%
*Model inception 3/29/2012
Dividend Growth: Since its inception on March 29, Sizemore Capital’s Dividend Growth Portfolio has performed as expected, returning 5.3 percent vs. 2.7 percent for the S&P 500 Index over the same period (the model was launched on 3/29/2012).
The portfolio is currently allocated approximately 30/30/30 between dividend paying stocks, equity real estate investment trusts, and midstream oil and gas master limited partnerships, with an additional 10% reserved for other income-producing sectors and strategies.
In a secular bear market, stocks tend to move sideways for years, interrupted by sharp rallies and sharp selloffs. In this kind of market, an income-focused strategy is going to be the best choice for reliable realized returns.
Sizemore Capital continues to recommend the Dividend Growth Portfolio for investors who want a high and growing stream of income in an environment where attractive yields can be hard to come by.
Tactical ETF Portfolio
Through the first three quarters of 2012, Sizemore Capital’s Tactical ETF Portfolio returned 6.9 percent vs. 14.6 percent for the S&P 500 Index.
The Tactical ETF Portfolio has underperformed the S&P 500 in 2012, much to our frustration. The portfolio’s mixture of quality dividend payers and selective tactical speculations in European, emerging market, and technology shares is one that we believe will do well for the remainder of the year. But our timing and execution of this strategy throughout 2012 has been disappointing.
Alas, we are not alone. 2012 has been a brutal year for most global macro traders; the average hedge fund is up barely 3%. Macro traders have found the Eurozone debt crisis particularly hard to navigate, and unfortunately we have not proven to be an exception in this portfolio.
Sizemore Investment Letter Portfolio
Through the first three quarters of 2012, the Sizemore Investment Letter Portfolio returned 13.6 percent vs. 14.6 percent for the S&P 500 Index.
In this environment, we are quite happy with these returns. The SIL portfolio is heavily weighted in European shares via our “Emerging Markets Lite” theme. Over time, we expect this to outperform our benchmarks by a wide margin. But in a see-saw year like 2012, we are happy to simply be keeping pace.
Overall, we are very satisfied with the way our investment themes are working in this model. Our “vice” investments in alcohol and tobacco have performed particularly well, as have many of our demographic investments focusing on the rise of the Echo Boomer generation. As I said above, our Emerging Markets Lite strategy is also performing well despite its large allocation to Europe.
The one area for mild concern is our “Glamour and Glitz” theme of buying luxury goods companies with strong exposure to emerging markets. Fears of a harder-than-expected Chinese slowdown have weighed on the luxury sector, and the earnings releases over the past three months have been mixed.
We believe that the bearishness in this sector is overdone and still see a lot of value. But should conditions continue to worsen, we will have to reevaluate this theme.
We are particularly excited about our exposure to African markets going forward. We consider Africa to be the last investment frontier, and we expect the continent to be a bright spot in an otherwise lackluster global economy over the remainder of this decade.
Strategic Growth Allocation
Through the first three quarters of 2012, the Strategic Growth Allocation model returned 11.1 percent vs. 14.6 percent for the S&P 500 Index.
The Strategic Growth Allocation has performed as expected, generating consistent returns while avoiding some of the wild swings in the S&P 500. The portfolio underperformed the S&P 500 over the period, but while taking less risk and suffering less volatility.
Looking forward to a profitable finish to the year,
Disclosure: Performance discussed is net of advisory fees. The index comparisons herein are provided for informational purposes only and should not be used as the basis for making an investment decision. There are significant differences between client accounts and the indices referenced including, but not limited to, risk profile, liquidity, volatility and asset composition. The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry, among other factor.
The investments discussed are held in client accounts as of September 30, 2012. These investments may or may not be currently held in client accounts.The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or that investment decisions we make in the future will be profitable.
Certain of the information contained in this presentation is based upon forward-looking statements, information and opinions, including descriptions of anticipated market changes and expectations of future activity. Covestor believes that such statements, information, and opinions are based upon reasonable estimates and assumptions. However, forward-looking statements, information and opinions are inherently uncertain and actual events or results may differ materially from those reflected in the forward-looking statements. Therefore, undue reliance should not be placed on such forward-looking statements, information and opinions.
