Growth Portfolio structure

The Growth model portfolio is a mix of an always invested “core portfolio” and some tactical positions that vary depending on what’s going on in the market at any given time. Furthermore, the tactical positions may have the flexibility to go to cash when markets are particularly risky. The overall portfolio is comprised of 10 “sleeves” of 10 percent each. The makeup of each sleeve is likely to evolve as market opportunities change. This post describes the portfolio structure as it looks in the Spring of 2017. It may change without notice in the future. Also, keep in mind that this is a “red money” portfolio, oriented toward growth – generally – as described in a prior post.

The core portfolio is more “buy and hold” in its construction, generally. At present, the portfolio incorporates two positions that many investors would consider “value” positions, and two other strategies that are more “growth” oriented.

The first core position is a “contrarian” investment fund that invests in out-of-favor securities. The Invesco Comstock Fund (ACSTX) invests in companies that have fallen out of favor. It competes with other contrarian funds at Oakmark, Longleaf Partners, and Deutsche Bank’s Dreman fund, among others. The efficacy of contrarian investing goes in and out of favor, which is an issue that this part of the core portfolio will have to address. Still, having a portion of the portfolio dedicated to the honorable pastime of trying to buy low and sell high seems like a reasonable strategy. As the year goes, part of what the Market Monday blog posts will address is how do some of these contrarian strategies compare with one another at any given point in time, as well as the more important question of whether or not any contrarian strategy should be incorporated into the core at any given time.

The second core position, another value position, is a fund oriented toward the financial sector. The financial sector is a large portion of any index. If financial stocks are doing well, just having one tactical sector fund won’t be enough to keep up. It will take at least two funds specifically focused on financials. Thus, it makes sense to have a core position looking for good stocks in this sector. Having searched for a focused sector fund with a great track record, but failed, right now the portfolio is invested in a low cost broad sector exchange traded fund. Over time, this holding may rotate among different areas of the financial sector. Good sub-industry exchange traded funds are available. Currently, however, most areas of the financial industry appear to be attractive so a broadly diversified but extremely low expense ratio fund is what made it into this slot.

The third core position is the Janus Global Technology Fund (JAGTX). This fund gives the fund manager free reign to invest in tomorrow’s best companies. History has shown that a few companies generate a great deal of the total market gains. Amazon, growing from nothing to a global behemoth, is a great example. Apple Computer, Tesla, Google and Microsoft are all tremendous value creators. My own stock picking biases toward companies selling for low Price/Earnings ratios don’t help a lot in this area. My own attribution analysis shows that low P/E tech investing has worked OK, but the best ideas – those that grow into tomorrow’s giants, typically don’t get cheap enough to find their way into my traditional individual stock portfolio. It is better, I think, to hire a firm conversant in where technology is going and defer this segment to them.

The fourth and last “core position” is in another typically “growth” area, healthcare. Healthcare is a very interesting sector. In a robust economy when growth is king, biotech and medical device companies will go on a tear. However, in a down economy, the healthcare sector also offers “defensive” alternatives like pharmaceutical companies where persistent sales and steady pricing power are the key to steady sales and earnings, no matter what is going on with the rest of the economy. Whereas a position in healthcare would be considered a “core position,” WHICH sub-sector is owned is more actively managed depending on what is going on in the world. Since the 2016 election cycle, politicians from around the world have made pharma companies their favorite punching bag. Biotech companies, too, have suffered from this increased attention to drug pricing. In the long run, however, big pharma has significantly reduced their investment in new drug development. The drug research gurus know that if they have a new idea, the best way to monetize their discovery is to get venture funding, take the small biotech company public, and then sell out to a big pharma name once the new drug is developed and headed to maturity. Biotech prices fluctuate from expensive to outrages. After a year or so of political hardball, it seemed like time to put these biology gurus to work and let time and talent do their work.

Outside the core, there are also specific sectors that will find their way in and out of the portfolio, and diversification through other asset classes that either add potential return or reduce overall portfolio risk. Next week is rebalancing week. I may know how I’m repositioning by the end of Monday, but I’ll update as best I can and then finish the description of the sector and tactical (diversification) parts of the portfolio the following week.