This is the ninth piece in Seeking Alpha's
Positioning for 2014
series. This year we have once again asked 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.
Roger Nusbaum is an Arizona-based financial advisor at
Your Source Financial
who builds and manages client portfolios using a mix of individual
stocks and ETFs. Roger's popular blog,
, focuses on 'top down' asset allocation. Regular readers of his
blog know Roger is an avid global traveler, and he is constantly on
the lookout for fresh foreign investment ideas.
Seeking Alpha's Abby Carmel and Jonathan Liss recently spoke
with Roger to find out how he planned to position clients in 2014
in order to reach their long-term objectives, in terms of both
domestic and global portfolio diversification.
SA Editors ((
How would you describe your investing style/philosophy?
Roger Nusbaum ((RN)):
We believe a globally diversified portfolio offers clients the
chance for achieving their long-term goal which is usually having
enough money to fund their idea of retirement. More specifically
the portfolio is top down with decisions made based on fundamentals
of what sectors and countries to be overweight/underweight or be
out of altogether.
We also seek to take defensive action based on the S&P 500's
200 day moving average. A breach is often, but not always, an
indication that the probability of a large decline has increased.
We also consider an inverted yield curve as a warning as well but
the next bear market is unlikely to involve an inverted yield
We are big believers in studying market history because many of
the behaviors exhibited in market prices tend to repeat cycle after
cycle like industrials tending to go up more than the broad market
during the bull phase of the cycle and down more during the bear
phase. Being cognizant of history also serves as a reminder of
basic but hugely important investing building blocks like the
market going up most of the time but occasionally it goes down a
lot. That should read very simplistically by design.
Do you prefer broad index funds, or individual stocks when
Broad based index funds are absolutely a valid methodology for
investing but there are many valid methodologies for investing. We
use mostly individual stocks and some specialized ETFs for the
equity portion of the portfolio with about a 2/3-1/3 ratio.
Narrower exposures like stocks and specialized ETFs make it easier
to express sector and country weightings as well as manage other
portfolio attributes which could include volatility, yield, cap
size as well as some others. The risk of course to individual
stocks and specialized ETFs in this context is being wrong in the
conclusions you draw.
How do you benchmark your performance?
We benchmark to the S&P 500 which is not necessarily ideal for
a global portfolio but back when we started there was no easy way
for clients to access the constituency of the MSCI World Index or
even to track it, whereas the S&P 500 is easy to follow. Also
we think of it as if the client were investing on their own, there
is a high likelihood that an S&P 500 index fund (or some other
broad domestic index fund with a very high correlation to the
S&P 500) would comprise the bulk of their portfolio.
While obviously no one has a crystal ball, what is the likelihood
equities can continue their current run? At what point do you start
taking risk off the table for clients (perhaps you already
In their quest for perpetual negativity, Zerohedge recently tweeted
something along the lines of 2014 bringing us one step closer to
"the end." Despite their biased selling of doom, the tweet in
question was technically correct whether the end meant the next
bear market in the next year or two or three or the end of humanity
in the next umpteen thousand years or whatever.
The point is to tie in with the above regarding market history
and stock market cycles. Bear markets come along every so often and
based on the average duration of bull markets, we are about a year
and half overdue for a bear market. The point here is not to
predict when the next bear will come but simply to make sure
clients remember that bear markets are a normal part of the stock
market cycle. As sure as there is no daylight in Barrow, AK for
about six weeks in the winter, there will be large declines in the
equity market every few years.
No matter what is going on at any moment there is always a bull
case for equities (or any asset class for that matter) and a bear
case. That has been true all the way up from the bottom in 2009 and
will be true all the way down from the top of the current move to
bottom of the next bear.
The bear case now includes weak earnings guidance (94 of the
S&P 500 have issued negative Q4 guidance), some economic data
looking lousy, rates appearing to be on the verge of going up
meaningfully, various sentiment gauges reading very bullish and the
extent to which the rally is so long in the tooth.
There are just as many if not more bullish points including the
Fed being accommodative for many years to come, interest rates are
still low, there are some economic data points that look very good
and so on.
We have opinions - markets are unlikely to keeping going with
anywhere near the velocity of the last two years and with a nod to
Zerohedge we are moving closer to the next bear market and no one
should be surprised if it starts in 2014, but predictions like this
carry far less value than a disciplined investment strategy.
Regardless of how we think markets should work, we will start to
take defensive action based on the indicators mentioned above.
Beyond allocating to stocks and bonds, what other asset classes do
you use as diversifiers?
We maintain a small weighting in gold with the SPDR Gold Trust
[[GLD]] and the Index IQ Hedge Multi Strategy Tracker [[QAI]]. As
part of our defensive strategy, we would increase exposure to other
holdings that tend to not look like the stock market and perhaps
add an inverse index fund or the Ranger Equity Bear ETF
It is interesting what a bad rap that gold got this year but it
did exactly what an equity based investor would hope; it had an
almost perfect negative correlation to equities. We've owned gold
for a long time in the expectation that when bad things happen in
the world or in markets, gold would do relatively well but long
time readers may recall my saying that if gold is the best
performer you have, chances are things aren't going well everywhere
else. In the context of being a diversifier it continues to work,
in the context of a core holding like in the permanent portfolio it
is a big drag on returns.
You have been known to look outside the U.S. for investing ideas.
Where are you looking right now and why?
We are fundamental investors and where investing at the country
level is concerned we care about things like debt, demographics,
stability, quality of life, the country's role in the world's
economic order, whether the country has something the world needs
or any other fundamentally justified catalyst for success. Things
often go up for reasons having little to do with fundamentals but
it is difficult to explain an investment to a client that did not
work out when the fundamentals were terrible going in.
The Global Greece ETF (
) is up 24% YTD which is a great return but there was no
fundamental story there to presage that result. Great for anyone
who made that trade, it's just not what we do.
Given the long-term things we look at, we continue to own most
of the same countries we've owned for a while. The need for crops
and dairy (things the world needs) from New Zealand is not terribly
volatile, Norway will not take on a choking debt load while at the
same time run out of oil in the next couple of years, the median
age in Chile is not going to jump to 45 (the median age in Japan)
from 33 next year nor will it be out of copper for when global
demand ramps up again.
We also look at themes and a way to look at themes is look for
where money is going to be spent. That takes us to infrastructure
and the iShares Emerging Markets Infrastructure ETF [[EMIF]]. It
has a decent mix of cash flow companies like toll roads and
airports and builders/modernizers of infrastructure. The stocks
involved may go up and down like anything else but there is no
question that the money will be spent. We own Global X Fertilizer
[[SOIL]] and PowerShares Water Portfolio [[PHO]] for similar
reasons; money will be spent trying to solve the world's problems
with food and water.
In addition to the countries above, we're also favorably
disposed to Colombia, Canada, Sweden, Switzerland and Denmark. We
have limited exposure to China through ETFs but we've been a little
more tactical with China over the years and so that exposure could
increase at any time. We are currently out of Australia but that is
another one we keep close tabs on.
When you consider foreign investing ideas, how closely do you
assess geopolitical risks? As a general rule, do you feel the
market is efficient at factoring in potential risks of this nature
into current pricing, or do you have your own assessments?
As mentioned above, stability plays a role. Thailand has a coup
every couple of years so we've avoided it. We were early to see
economic instability in Europe but late with social unrest in
Brazil. In this context, I don't think Europe and Brazil are
permanently broken but it is not clear that Thailand has ever been
stable. Turkey has been in a similar situation as Thailand most of
the time but Middle Eastern markets seem to go back and forth with
stability (even Qatar has had some protests).
Emerging markets significantly underperformed developed markets in
2013. What sort of exposure do you have to Emerging Markets? Is
2014 the year things revert to the mean?
We currently target a 7-8% direct weight to emerging markets which
is low for us based on what we've done in the past. We also have a
couple of stocks like Scotia Bank [[BNS]] which is a beneficiary of
As far as reverting to the mean in 2014, after lagging for the
last couple of years it is reasonable to expect a market segment
like emerging markets to rotate back into relative favor.
Regardless of whether 2014 turns out to be the year or not,
investors who are capable of looking at the long term can see
favorable long-term fundamentals in many EM markets, an ascending
middle class with newfound discretionary income and a general
improvement in the quality of life and equity prices that are
relatively low. Buying the unloved market segment is not the worst
idea in the world.
However there are markets that face some clear and obvious
obstacles that might be better avoided. The reduction in asset
purchases by the Fed and the eventual increase in interest rates
hurts countries that most rely on foreign direct investment - no
need to invest abroad when higher yields can be had back home in
the US. The poster child for this has turned out to be
There has been growing interest in Frontier Markets, with assets
flowing into funds like iShares MSCI Frontier 100 Index ETF [[FM]].
The thinking has been that as these economies are still relatively
under-developed, getting in now will yield results similar to
investing in Emerging Markets 15 years ago. What do you make of
this line of thinking? Do you have any Frontier Markets
The basis for investing in developing markets from the bottom up to
is to capture an ascending, modernizing country on its way to
playing a larger role on the world economic order. From the top
down there is the potential for a diversification benefit for
something with a low correlation to US equities.
Countries like South Korea and Taiwan aren't really emerging
markets anymore but some broad EM indexes still include them. This
serves to reduce the potential low correlation benefit that can be
had by investing in developing markets.
Frontier is a valid way to capture developing markets but
expecting a repeat of emerging market returns from ten years ago
seems like a stretch. EM started to lift before most investors were
looking for anything and your question captures today's sentiment
looking for the next… A reasonable expectation is delivering a
better risk adjusted return over long periods of time. If FM goes
up 300% over the next ten years all the better but not as an
Investors most comfortable with broad based funds could look at
the beyond BRICs funds from EG Shares which has symbol [[BBRC]] and
the one from Global X which has symbol [[EMFM]]. The beyond BRIC
fund from SPDR is heavy in South Korea.
Is there a single country or region (can be developed, emerging or
frontier) that you are currently very bullish on and are
overweighting in client portfolios as a result?
Technically speaking we are probably most overweight New Zealand.
We target a 3% weight with the iShares New Zealand ETF ENZL but the
country only has microscopic weightings in any of the broad
indexes. We own it for the agricultural theme noted above, it also
tends to have low volatility and a high yield.
We have no exposure to Japan or the EU. The returns for the
Nikkei and DAX were great this year but fundamentally Japan and the
EU are basket cases and we aren't going to invest without a
fundamental tailwind (printing yen is not a fundamental
Any additional considerations you'd like to share with readers as
they ponder their investing strategy in 2014 and beyond?
Investing requires patience. The tilt to this interview has been
toward foreign probably because I believe in foreign investing as a
crucial way to help our clients achieve their long-term objectives.
This is our strategy. In years where foreign outperforms domestic
then a portfolio that includes foreign holdings has a good chance
for outperforming a domestic only portfolio but when foreign lags
domestic, a portfolio that includes foreign is likely to lag a
domestic only portfolio. In the future, as in the past, there will
be times when foreign outperforms domestic and times when it
Now apply this to whatever your strategy is because your
strategy cannot outperform every single year, no strategy can.
However, even though your strategy or my strategy or anyone else's
cannot be the best every year, it can still allow you to reach your
goal which is presumably being able to fund the lifestyle you want
when you stop working. Of course, other major determinants for
success will be your savings rate, spending habits and avoiding
succumbing to emotion.
Client and/or personal holdings in GLD, QAI, EMIF, SOIL, PHO, BNS,
To read other pieces from Seeking Alpha's Positioning for
Reversion To The Mean Phenomenon: Part I