In BSW Blog, Economic Outlook, Emerging Markets, Portfolio Commentary

Special Note: Please be sure to check out BSW Events and the bottom of this commentary for information on two BSW-sponsored or supported events coming to Boulder this April!

“Many a false step was made by standing still.” – Chinese Proverb

We recently completed a rebalancing of BSW Growth Portfolios, prior to the close of the first quarter of 2013.  Our rationale was simple and three fold: Harvesting Gains, Macro-allocation Adjustments, & Tactical Rotations.

Harvesting Gains:

Our Growth Portfolios had exceptional returns in 2012, however, in contrast to the broader media’s newly found love for stocks, we cultivate a “constant gardener” approach to investing which mandates prudently harvesting gains, taking profits on winners, and bringing portfolios back into alignment with their longer-term allocation targets and risk profiles. Quite simply, when markets make new highs a dose of caution is more warranted than a dose of courage.

Macro-allocation Adjustments:

For several years now, we have been concerned about Europe regarding economic stagnation from draconian austerity, the continued drag of insolvent banks, and underlying political and structural dynamics that prevent decisive or consistent action to address these problems.  We were more optimistic about the US due to impressive earnings growth, historically low valuations and the backstop of the Federal Reserve’s unprecedented (and dangerous) loose monetary policy. As these factors have played out, US stocks no longer look so mispriced relative to their developed-market peers and now appear fairly valued rather than cheap. Meanwhile, Europe (as evidenced by sovereign bond yields, which haven’t moved much, despite the Cypriot fiasco) is slowly, clumsily, and painfully staggering forward.

Although Europe will broadly be in recession during 2013, we are careful to distinguish European countries from European companies.  As occurred in the US during the past three years, smaller and more nimble companies will lead out of recessionary environments and international small-cap companies now have their biggest valuation advantage over their large cap brethren in the past decade.  Consequently, we have introduced a new, international small cap position.  In other words, a small dose of courage is now more warranted than caution.

Tactical Rotation:

Continuing along with the themes of harvesting gains and a constant gardener approach, we booked profits on roughly two-thirds of our Alternative Assets position in High Yield Bonds.  We were originally attracted to high yield by their historically high spread to 10-year treasuries (see our July 2012 blog post, here) and low default rate.  That analysis was well rewarded, as yield-hungry investors discovered the asset class.  Our original investment thesis was predicated on yield spreads, so we keep a close and watchful eye on this metric, which has slowly crept downward and now sits at or just below its historical average.  This and other factors including the characteristics of new high yield issuance and unsustainable fund flows, suggest to us that it is now the “8th inning” for high-yield.  Additional marginal gains may be eeked out, but here too a dose of caution is more warranted than a dose of courage.

 

We hope this Update & Commentary provides you with better insight into your BSW Growth Portfolio.  If you would like to discuss these positions or your portfolio in greater detail, please don’t hesitate to contact BSW.  As always, we are happy to help.

— David Wolf, Chief Investment Officer

***PS — Two outstanding BSW-sponsored or supported events are coming to Boulder this April: the Conscious Capitalism Conference – CESR Stampede (April 15-19) & the Slow Money National Gathering (April 29-30) — check them out and hope to see you there!***

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