By
Gary Gordon
:
This is the seventh piece in Seeking Alpha's
Positioning for 2013
series
. This year we have taken a slightly different approach, asking
experts on a range of different asset classes and investing
strategies to offer their vision for the coming year and beyond. As
always, the focus is on an overall approach to portfolio
construction.
Gary A. Gordon, MS, CFP® is the president of
Pacific Park
Financial
, Inc., a Registered Investment Adviser with the SEC. He has more
than 23 years of experience as a personal coach in 'money matters,'
including portfolio management, risk assessment, and small business
development. Gary writes regular commentary at
ETF Expert
. He currently hosts the ETF Expert Show.
Seeking Alpha's Jonathan Liss recently spoke with Gary to find
out how he planned to use
ETFs
- including alternative ETF strategies not frequently found in more
typical investor portfolios - to position clients in 2013.
Jonathan Liss ((JL)):
How would you describe your investing style/philosophy?
Gary Gordon ((
GG
)):
Information processing is the best way to describe the way that I
invest. I gather information (e.g., fundamental, technical,
contrarian, economic, historical, etc.), select exchange-traded
funds based on that information, and control the investment outcome
of every decision. Information is the input, choosing ETFs with
stop-limit loss order protection is the process, and the outcome is
always a big gain, small gain or small loss. Whether using a hedge,
a stop or a trendline for controlling the outcome of an investment
decision, no big losses are permitted in portfolios.
JL:
I've been meaning to ask you this for awhile now. As you just noted
- and frequently note in your writings, you actively manage
downside risk via stop-limit loss orders but don't spell out what
the exact parameters are. Do you use the same percent stops for
every holding, or does it vary by fund? If it varies, is that based
on riskiness of asset class, historical SD, or some other factor or
set of factors?
GG:
Stops vary by two primary factors - the risk of the asset and the
weight in the portfolio. In general, although volatility can change
on any asset (i.e., [[TLT]] is a good example), fixed income assets
are less risky than higher-yielding income; large cap dividend
stocks are not as risky/volatile as large cap growth or small caps,
which are not as risky as foreign and emerging equity and so
forth.
The second factor is the weight in the portfolio. If theSPDR
S&P 500 ETF (
SPY
) is 10% of your portfolio, one might select a hard trailing stop
at 7.5%. If SPY is only 5% of the portfolio, however, the impact on
the portfolio is half as much, and a 15% stop would have the same
impact. That said, 15% stops are much wider than I would ever use,
and I might employ trendlines to make the sell determination. Or, I
might sell ½ a position at 8% and the other half at 12%.
In sum, there are many ways to reduce risk, with stops being one
of them. And please don't ask when you "by back in." There are
1,500 other ETF choices to buy when you sell something. Or if one
insists on buying the same asset, one can use the exact same
parameters coming off a low reached from the point at which you
sold - i.e. a 7.5% climb off of a low that is reached.
JL:
As we approach 2013, are you bullish or bearish?
GG:
The question is somewhat irrelevant for an information processing
approach to market-based securities. Technical weakness can arise
during the 2013 year, though strength and value is evident in a
number of emerging market stocks. I expect many to offer double
digit returns, so that may be viewed as bullish.
I believe in the China turn-around theme, and am bullish on the
country's Asian neighbors like Malaysia and Singapore. Pacific
providers like Australia and Latin American resources standouts
(e..g, Chile) should be among the leaders.
On the other hand, I am less excited by high-flying emergers
from 2012 like Turkey. And I am not sold on MENA (Middle East &
North Africa). I expect Europe to be the source of enormous
consternation yet again, and do not recommend any unhedged exposure
to the region.
JL:
Which asset classes are you overweight? Which are you underweight?
Why?
GG:
In U.S. stocks, I am currently overweight telecom as well as
consumer staples and discretionary. I am underweight domestic
common stock utilities. I like Asian country and regional stock
ETFs.
In income, I have zero exposure to any developed world
treasuries. I am sticking with emerging market sovereign debt. I
have plenty of exposure to emerging and U.S. corporates, investment
grade and high yield… and believe that ETFs diversify the risk
adequately. I like preferreds, excluding banks viaMarket Vectors
Preferred Securities ex Financials ETF ( PFXF). In fact, most of
the exposure here to income is via ETF.
JL:
Which benchmark do you use?
GG:
We manage money for all different client needs, from non-stock
ultra-conservative to 100% stock ultra-aggressive, so there is no
single appropriate benchmark for performance. That said, for
moderate investors where we may target 65% growth/35% income in
uptrending markets, and where we may be closer to 40%/40%/20% cash
in downtrending markets, it'd be appropriate to benchmark against a
classic 65%/35% buy-n-hold stock/bond index or a Lipper Balanced
Fund average.
JL:
Do you mean 'capital appreciation' when you say '65% growth', or
something else? Does 65% growth/35% income mean that's the
stock/bond divide, or would things like high dividend stocks, REITs
and MLPs count towards the 'income' side of things? Where do
commodities fit in to that mix?
GG:
Growth is primarily capital appreciation. It does not mean that
that there aren't dividends or distributions of some kind involved.
It simply means that in the course of total return, one's
expectation is for more of the total return to come from capital
appreciation. Income is primarily interest and yield that one
expects to be the larger component of the total return (on that
side of the portfolio). Investment grade bonds through
convertibles, high yield, preferreds - both foreign and domestic -
fit the bill for 'income'.
Of course there are a few exceptions. I might expect 5% growth
and 5% yield from an MLP or REIT - but that is essentially growth.
Here you have to take into account the volatility of the asset as
well. Is the standard deviation more like a fixed income vehicle or
a stock vehicle? That will be the primary determining factor.
Commodities fall out on the growth side.
I realize that whether you are talking about stop losses or
allocation, you'd like black-n-white… but investing involves plenty
of shades of gray. You wouldn't use a 200-day moving average for
the S&P 500 SPDR Trust (
SPY
) to buy or sell the Global X Columbia 30 (
GXG
) or iShares MSCI Chile (
ECH
) or iShares Preferred (
PFF
) or PowerShares Bank Loan (BKLN). They all have their own
trendlines for that decision-making. Same with stop-losses.
Asset Allocation is the same. It's not black and white across
every asset. For the post part, you can use growth when the largest
contributing component to total return expectations is capital
appreciation and you use income when the largest contribution comes
from the expected cash flow (yield).
JL:
Perhaps more than any popular portfolio manager on Seeking Alpha,
you have been a consistent early proponent of ETFs offering
alternatives to standard market cap weighted funds.
GG:
Why thank you.
JL:
Among funds you have advocated in just the past few months are the
WisdomTree Europe Hedged Equity ETF (HEDJ) which allows investors
European equity exposure while hedging a declining euro as well as
low volatility alternatives like Emerging Markets MSCI Minimum
Volatility ETF (EEMV) and PowerShares S&P 500 Low Volatility
Portfolio ETF (SPLV). How do you determine which newer
products/strategies are worthy of further consideration, and which
are just a passing fad? What are the minimum liquidity and AUM
requirements before you seriously consider a fund?
GG:
I recently gave a presentation at the Global Indexing and ETF
Conference in Phoenix AZ on this very topic. If you're talking
about a person, a product, a business, a team or even a country,
the key ingredients are the same: One part innovation, one part
motivation and one part "right place, right time."
So, in determining ETFs that are worthy of consideration versus
a passing fad, an excellent idea must be accompanied by great
timing and phenomenal fund provider commitment. It's not enough to
open up shop and declare a "Small Cap Emerging Markets Materials
and Infrastructure ETF" a masterpiece.
Take SPDR Barclays Capital Short Term High Yield Bond (SJNK).
Before March of 2012, if you wanted access to a diversified basket
of short-term high yield corporates, you had to go with a single
year in the Guggenheim BulletShares series. Not that there's
anything wrong with that. On the other hand, the folks at State
Street designed SJNK with greater tradability and one-stop access
to the asset class in mind. $520 million in inflows in 8 months is
probably a great sign that SJNK's 5.2% via 338 holdings (avg
maturity 3.5 years) has a great shot at enduring.
As for the idea that "low volatility" may be just a passing fad,
don't expect investors to abandon "New Normal" thinking anytime
soon. Sure they will lose some luster in a raging bull market, but
as long as there's a place for tradable alternatives to
buy-and-hold, expect money managers to look for something that
diversification alone isn't able to provide - a smoother ride. And
yes, that makes a staples/health care/utilities heavy iShares
Emerging Minimum Volatility ETF (EEMV) a worthy alternative
toVanguard Emerging Markets Stock ETF ( VWO).
Average daily dollar volume for an ETF must be greater than
$100,000. And I prefer ETFs with at least $50 million in AUM.
JL:
How much of an allocation do you feel alternative investing
strategies generally deserve alongside 'core holdings'?
GG:
I genuinely do not view the alternatives as being altogether
different than "core." If the info is pointing to non-cyclical
strength, perhaps EEMV is chosen over VWO. If strong evidence is
suggesting cyclical success, core ETFs likeiShares Russell 1000
Index ETF ( IWB) andiShares S&P MidCap 400 Index ETF ( IJH)
would be preferable to SPLV. And if I want access to Europe, why do
I need a "core" unhedged Europe likeVanguard European Stock ETF (
VGK) when the dollar-hedged HEDJ is less of a risk.
JL:
Which alternative equity strategies do you feel offer the best
upside potential/downside protection heading into 2013 and
beyond?
GG:
Best upside potential? If we consider Asia ex-Japan an alternative
equity allocation, theniShares MSCI All Country Asia ex-Japan Index
ETF ( AAXJ) fits the bill. We've already discussed EEMV.
AlsoPowerShares DWA Emerging Markets Technical Leaders Portfolio
ETF (PIE) is on my radar .
To be clear, I don't believe in buying any investment without
active management of the downside risk. I do not buy and hold for
the upside potential. I always make sure that an outcome is a big
gain, small gain or small loss. PFXF has downside protection built
in from eliminating financial stock volatility, but even here, I
actively manage downside risks.
JL:
How many portfolio holdings is too many to properly manage? How
many is too few to offer proper diversification?
GG:
When it comes to ETFs, 15 tends to be the upper limit. Less than 8
is unlikely to provide enough diversification across
U.S./foreign/emerging growth and income.
JL:
Let's revisit the fixed income space. You were also an early
adopter of Emerging Market sovereign debt ETFs. Are you still
bullish on these funds? Do you prefer the plain vanilla or local
currency versions of these funds?
GG:
Honest to goodness, I think investors should be looking at all
fixed income from emergers, from local currency to dollar hedged,
from sovereign to corporate, from investment grade to high yield.
The choices are as much about risk tolerance and diversification,
and would be just as important to consider as everything in the
U.S. fixed income space.
Personally, I see little value in Treasury ETFs, and only
consider them as a short-term safe haven move. Even then, I prefer
short-termiShares Barclays 1-3 Year Credit Bond ETF ( CSJ), or
money market cash. For at least as long as the world's central
banks artificially depress rates, one has to look at the better
yielding alternative and the historical spread. If the historical
spread between emergers and U.S. treasuries were tight, I might
reduce exposure. But as long as the spreads remain historically
favorable, as long as technical trends tell me to stay there,
emerging debt works.
JL:
Where have you been having retirees turn for income in this record
low rate environment? How have potential changes to the tax code
affected your assessment of interest-paying investments?
GG:
I've had to trim MLP ETFs from client portfolios. This was an asset
class that I normally used as a go-to winner. Yet dividend
uncertainty as well as MLP structure uncertainty has sent them into
a downtrend. I haven't backed out of Muni ETFs, even with the
selloff on chatter of reducing tax-exempt status for the wealthy. I
will let the long-term trend and stop-losses dictate that
decision.
Retirees simply can't get CDs or short-term investment grade
bonds to do the trick in this environment. I've simply needed to
move up to intermediate and long-term investment grade, senior
notes, convertibles, preferreds and emerging debt. I actively
monitor the downside risk, so we are watching the possibility of
interest rates rising as a catalyst to trim exposure.
JL:
Which global issue is most likely to adversely affect U.S. markets
in the coming year? Issues which feature prominently in our minds
at present include continued Eurozone contagion risks; the Iranian
nuclear threat/potential disruption to global energy markets; a
Chinese economic slowdown; and accelerated climate change and
weather-related events.
GG:
China's economy has already stabilized and will continue to show
recovery signs. I'm not on the China hard landing wagon. It is
already a soft landing from my perspective. The Eurozone is, was,
and will continue to be a major problem in my book. The Middle East
and Israel's diminishing patience with many of its border enemies
could also create havoc.
JL:
Do you believe gold and other precious metals are a genuine hedge
in uncertain markets? If so, how much exposure do you have?
GG:
Yes I do, but 5% is the most direct exposure ([[IAU]], [[GLD]]) I
place in portfolios. There may be some indirect exposure at
times.
JL:
What advice would you give to a 'do-it-yourself' investor in the
present investing environment?
GG:
Keep costs as low as possible by using ETFs, and where possible, no
cost trading of those ETFs. TD Ameritrade has more than 100 that
trade at no cost. Strive for a total portfolio yield that is at
least 2x the current 10-year treasury yield. That's a good
yardstick, if your cash flow is 3.5% when the 10-year is 1.75%.
Also, spend at least 45 minutes a week, perhaps on Friday,
making sure that your individual positions remain in a long-term
uptrend. If not, consider the circumstances under which you would
sell that position to secure a big gain, small gain or small loss.
In that manner, you won't ever have the one bad apple that spoils
your entire basket.
To read other pieces from Seeking Alpha's Positioning for
2013 series,
click here
.
Disclosure:
Gary Gordon, MS, CFP is the president of Pacific Park Financial,
Inc., a Registered Investment Adviser with the SEC. Gary Gordon,
Pacific Park Financial, Inc, and/or its clients may hold positions
in the ETFs, mutual funds, and/or any investment asset mentioned
above. The commentary does not constitute individualized investment
advice. The opinions offered herein are not personalized
recommendations to buy, sell or hold securities. At times, issuers
of exchange-traded products compensate Pacific Park Financial, Inc.
or its subsidiaries for advertising at the ETF Expert web site. ETF
Expert content is created independently of any advertising
relationships.
See also
Smoke And Mirrors In The Herbalife Saga
on seekingalpha.com