Sunday, March 27, 2011

Combining Core & Periphery Portfolio

  • Learning about the Markets Through Classical Music
  • The Center vs. Selective Peripheries
  • A Reasonable Approach

My wife Ruth and I heard a wonderful concert Saturday night by the New Jersey Symphony Orchestra performing four pieces at the New Jersey Center for the Performing Arts in Newark. I attend these concerts first because I enjoy them and second because Ruth is the NJSO’s co-chair. While listening however, I cannot turn off my investor’s mind. The middle two pieces of the concert were composed in the Viennese/Germanic tradition (Mozart and Strauss) and the bookend pieces were composed by Nielsen (Danish) and Sibelius (Finnish). I recognize that much more great classical music was produced from the center of Europe than the periphery. This essential truth also reflects today’s currency constellation, with the euro as the dominant central European currency.

A quick view of the foreign exchange tables for Europe however shows that most of Scandinavia, Eastern Europe, Russia and the UK are outside the central Europe I refer to above. A number of European region, SEC registered mutual funds have largely a euro focus or perhaps a GDP weighted portfolio. Just as we enjoyed the music composed by the non-Central European composers Sibelius and Nielsen, I wonder whether a greater focus on non-euro based portfolios would give the investor larger gains in selected time periods.

The Center VS. The Selected Periphery

There are many institutional investors and some high net worth individual investors that define investment success relative to the market. Advisers can therefore hug the middle with index or closet index funds and in theory reduce their personal career risk. According to the tables in Sunday’s New York Times:

  • Within the fifteen largest mutual funds, of the five best performers’ year-to-date, three were Vanguard index funds (*).

  • The single best was Dodge & Cox Stock (*)

  • The second best for this short period was American Funds Washington Mutual Investors Fund (*).

The last two funds are large cap actively managed, holding fewer securities than the index funds and with somewhat higher expense ratios. Over the same period, the Times showed the performance of the twenty largest stocks, eight of the twenty gained more than the best of the largest mutual funds. The eight in order were Chevron, Pfizer, Exxon, IBM, Apple (*), GE, JP Morgan (*) and Berkshire Hathaway (*) The big difference between the two lists is that the five leading large mutual funds had gains of 5.2-4.9% and the leading stocks had gains from 17.0-6.2%. I believe this very small sample of performers and a very limited period of time demonstrates that even in the large cap world, narrower focused securities can at times perform better than “the market.”

A Reasonable Approach

For many of our institutional accounts we try to address both the needs of searching for outstanding performers as well as participating in the central market tendency. Where and when possible, we will often have a core of funds that are close to the market (be they be active or passively managed) combined with highly selected, narrow focused funds. The ratio between the two segments is a market judgment. This approach is appropriate for long term accounts, but will not work as well as those that are short term performance oriented.

Thus my portfolio tastes, at times, reflect my musical preference of strong classics combined with quality representatives from a number of regions.

How do you divide your portfolios between the central tendency funds and those who march to a different drummer? Please fill out the following table that shows the focus of your accounts:

Core/index funds or securities ____________%
Narrow based funds/securities ____________%
Any clarifying comments?___________________________________________ .

Please send to Email Mike Lipper's Blog. All replies will be treated confidentially.

(*) These funds and securities are owned either by accounts we manage or me personally or both.

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