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

This week we completed a tactical rebalancing within BSW Growth Portfolios that resulted in the following changes (each of which will be further discussed below):

   1. Sale and full exit of our High Yield Bond position. 

   2. Sale and full exit of our Long/Short Commodities position.

   3. Initiating an Opportunistic position in the Energy sector.

   4. Taking profits on US Stocks by trimming these positions back to our target weighting.

Harvesting Gains:

Most BSW client portfolios were modestly overweight to Diversified Growth due to strong gains in Growth Equities, especially US Large Cap stocks.  We took this opportunity to harvest those gains and redeploy proceeds to underweight areas of the portfolio or replenish cash reserves.

Sale of High Yield:

We booked profits on High Yield position and fully exited our position, as yield-spreads have become too thin for our tastes and we were satisfied with our gains — in other words, “The juice was no longer worth the squeeze,” as my partner Ben Weaver likes to say.  We originally initiated our High Yield position in October 2011 due to historically wide spreads between yields and default rates, record high corporate cash balances, and attractive absolute yields (see full discussion here).  Since that time, all of these measures have compressed as others identified the opportunity and income-hungry investors foraged for yield.  As such, we sold two-thirds of our position (5% of portfolios) earlier this year in March 2013 and have now sold the last and final third (2.5% of portfolios) of the position.

Sale of Long/Short Commodities:

We exited our Long/Short Commodities fund after a disappointing gradual attrition to our stop-loss.  Although only a 2.5% weighting within portfolios, the position caused disproportionate heartache and angst within BSW’s Investment Group.  While our initial thesis of adding a manager who could short commodities (and thereby post gains as commodity prices fell) could have worked well (as commodity prices have fallen during steadily), our manager was consistently on the wrong side of trades and unable to reverse consistent declines.

New Opportunistic position – Energy:

Proceeds of High Yield and Long/Short Commodities have been reinvested in a new Opportunistic Energy position.  We like energy now for many reasons, key among them: 1) Valuation – Energy companies continue to trade at a significant discount to both the broader market and their historical levels; 2) Defensive to Cyclicals – Defensive sectors (such as Utilities and Health Care) have been trading at a premium as many investors sought safety or yield, a dynamic we believe will change as the economy continues to gradually expand; 3)  Global Growth – The US has been perceived as the “only game in town” in terms of economic growth, but many indicators suggest that global growth will improve and accelerate in the later half of 2013, which bodes well for energy companies and their profit growth.  As an Opportunistic position, our Energy holding will be tracked and evaluated relative to the ACWI and may be a shorter-term hold.

Check-in on International Small Cap:

As you may recall, in March we initiated a new position in International Small Cap (developed ex-US Small Cap companies), and have been pleased with the performance of this position so far.

 

We hope this summary provides you with better insight into your portfolio and BSW’s outlook.  If you have any questions regarding out positioning or would like to discuss your portfolio in greater detail, please don’t hesitate to contact BSW.

-David Wolf, Chief Investment Officer

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