How my contrarian bet on Facebook paid off

Since the Beckerman Institutional Asset Allocation portfolio inception a little over a year ago, we have achieved returns of about 16% (net of fees) over the last year as of August 8. Much of this return was fueled by positive returns in the U.S. stock market.

The S&P 500 Index (SPX) has continued to march into record territory. It was the alternative sorts of assets that we own that inhibited performance in our strategy.

However, I am building more conviction in these asset classes as they have become cheaper. Internationally, Europe is beginning to show some signs of bottoming.

Although, several emerging market countries have suffered from macro-economic headwinds (such as China and India), there is an abundance of opportunities all across the region.

Interestingly, some of the best performing US companies that I have owned, including Google (NASDAQ: GOOG), Johnson & Johnson (NYSE: JNJ), and more recently Facebook (NASDAQ: FB), are exploiting opportunities there. In my opinion, after our multi-year stock market run, the U.S. market no longer looks cheap.

The developed international and emerging market stock markets look cheap in contrast. Some of our more recent additions to the portfolio were international equities, ETFs with bank exposures, and shares of FB. I believe that in future years, international equities will act a diversifier and add to risk adjusted performance relative to the S&P 500 index.

I sold out of high yield bond ETFs and replaced them with bank loan ETFs. The reason is that there is no longer much of a margin of error in high-yield bonds. If you have a period of economic instability, the yield that you get in this asset class, overall, may not compensate investors for the default risk.

Bank loans, by contrast, have higher recovery rates in the event of defaults and they tend to be higher on the capital structure. Another key differentiation is the fact that bank loans become more valuable as interest rates increase. This is the opposite of most bonds including high yield bonds. When you are in a rising interest rate environment floating rate loans tend to do much better than other kinds of bonds.

I bought FB with the expectation that investors had become overly pessimistic on the stock. This surprised me because investors went from being very pessimistic on the stock to enthusiastic within a month.

Also, I rarely have experienced that kind of return in that short of a time frame and, although it would be great, I do not expect to replicate that going forward. The bulk of our strategy is designed to generate a favorable long-term return by being invested in the right asset classes while using some clever ideas to do it.

The investments discussed are held in client accounts as of July 31, 2013. 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 investment decisions we make in the future will be profitable.