Matthew MacClary is an engineer in the technology sector with a current gig at Hewlett-Packard and a previous stint at Marvell Technology Group. He leverages that engineering experience in managing the Stable Equity portfolio on Covestor.
“The portfolio uses a computer-driven approach that tries to optimize drawdowns and limit volatility,” MacClary says.
Stable Equity portfolio invests primarily in exchange traded funds and MacClary uses a computer algorithm to find the ETFs that can potentially produce a smooth portfolio return, while keeping the overall risk level of the portfolio to a minimum.
The portfolio can hold leveraged and inverse ETFs. It tends to hold less than 10 ETFs at any one time, and MacClary typically rebalances the portfolio on a monthly basis.
“I try to keep the portfolio diversified by investing in a relatively broad range of asset classes, but without too many different ETFs in the portfolio,” he said.
The largest holding in Stable Equity is iShares Russell 2000 Growth ETF (IWO), which holds U.S. small-cap growth stocks.
“One of the things the algorithm does is choose between the S&P 500 and small-cap growth, and recently it has liked IWO better,” MacClary said. “The bull market appears to be still going and so the portfolio has a relatively large allocation to small-cap growth stocks.”
For diversification purposes, the portfolio can invest in stocks, commodities ETFs and other asset classes. It currently owns PowerShares DB Commodity Index Tracking Fund ETF (DBC), SPDR Gold Shares ETF (GLD), iShares 20+ Year Treasury Bond ETF (TLT) and iShares 1-3 Year Treasury Bond ETF (SHY).
“I use TLT for exposure to long-term Treasury bonds, which tend to benefit from flights to safety and deflationary scares,” MacClary said. “I use the ETF for a hedge and diversification. SHY holds very short-duration U.S. government bonds. It’s a cash substitute and another diversifier for stocks.”
He uses DBC for exposure to a broad basket of commodity futures, including natural gas, wheat and aluminum.
Meanwhile, GLD gives exposure to gold specifically.
“Gold can move quite differently from stocks, and tends to benefit from inflation scares, monetary threats and debt downgrades. It’s a good diversifier and can benefit in market environments when other asset classes perform poorly,” said MacClary, who has an eclectic investing background.
“I first started investing in high school, buying individual stocks like Microsoft (MSFT) and holding them,” he said. “Then in college I managed my own money with a value strategy, adopting many of the principles of Warren Buffett and other value-oriented investors. I used quantitative screens to find value stocks, rather than a research-intensive approach of reading every company report and filing.”
However, he found that investing in value stocks produced a portfolio that was too volatile to his liking. However, he kept the quant approach and started investing in ETFs tracking entire asset classes, with a focus on portfolio optimization.
Some of MacClary’s favorite investors include Mebane Faber, and Harry Browne of Permanent Portfolio fame.
DISCLAIMER: The investments discussed are held in client accounts as of February 28, 2013. These investments may or may not be currently held in client accounts. ETF shares trade like stocks, are subject to investment risk and will fluctuate in market value. 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. Past performance is no guarantee of future results.
