Introduction
Developing the best
strategy and tactics for our clients’ investments is never far from my mind.
Thus, Saturday night at the annual birthday dinner for George Washington at Mount
Vernon, I listened to and spoke briefly with
David Rubenstein, the co-chair of the Carlyle Group, a very generous
contributor of his time and fortune to numerous non-profit organizations.
This was the second
time in the last couple of years Mr. Rubenstein spoke at this dinner. During the first he discussed his $10 million
donation to Mount Vernon, a non-government
supported charity to maintain the General’s estate and the legacy of his
incredible contribution to the success of the United States. In the Saturday
evening keynote discussion Mr. Rubenstein labeled George Washington as an
inventor which in today’s consciousness is higher than general or president.
The three “inventions” that he is crediting George Washington with were:
(1) The creation of the
first organization that the thirteen very separate colonies had was the
American Army, which when paid and equipped were much poorer than the various
colonial militias.
(2) The political drive
to create the US Constitution which for the first time created an executive
government ruling with the consent of the Senate.
(3) The rotation of
power; setting a precedent in declining a third term or
life-term as President.
Translating David Rubenstein’s
three Washington’s inventions into investment focuses I came away with the
following thoughts:
To win a war of
independence it is necessary to have sufficient sized forces to eventually win
the war even though various battles may be lost.
What was not lost was
the battle for survival. The second invention, while written by others, was
adopted by the Second Constitutional Congress chaired by George Washington and stressed
the need for controls and appropriate consultation without great interference
with executive execution.
You will see these inventions are similar in logic to part of our development of L Timespan Fund Portfolios
TM (Lipper Time Span Portfolios) but before we discuss one of these
portfolios, we should recognize that this past week demonstrated that the surge
that was mentioned last week has begun.
The
surge
In last
week’s post I discussed the one main missing
element to the surge that can lead first to a significant price performance of
20%+ (which will be followed by a larger decline). During the week both the Dow
Jones Industrial Average and the Standard & Poor’s 500 went to new high
readings. European stock indices are at a seven year high, Japan’s market is
also at a high point and the UK’s FTSE 100 is only 15 points away from a new
high. These global price moves suggest that many investors are showing profits in
their aggregate portfolio. Many investors with cash on the sidelines or
invested in bonds are very likely to be worried that they are being left behind
and will commit to purchasing stocks or equity funds of various types.
To create the desire to
buy at elevated prices one needs to have increasing confidence in the
future. My old firm, now known as Lipper
Inc., a ThomsonReuters company, has four separate growth fund classes based on
the average market capitalization of the stocks in their portfolios. In a
market where last year’s big long-term winner (Government bonds) are
essentially flat through the 20th of February, the four growth fund
averages on a year to date bases are up between 4.18% and 5.16%. A tight
performance group of leaders, the four Small Company Growth fund groups are
slightly behind. (I expect that some time during this surge they will lead.)
While performance
numbers may be a spur to some, many others need an enthusiastic story to lure
them into the marketplace that has already seen a significant advance. The
classic case is Apple which I have owned for many years, but have no special
knowledge about. Carl Icahn, currently a multi-billion dollar owner of the
stock, has been publicly touting an eventual price of $216 compared to the
current price of about $129. The media is jumping on with a story in this
week’s Barron’s
suggesting that the stock could rise 25% this year. Others state that the stock
is selling at a discount to its value with the forward price/earnings ratio of
14.7 times. I have no idea whether any of these projections will come true,
what I am focused on is that these and similar stories on some other stocks can
be the propulsion of enthusiasm which is needed to create a major top.
To me, the surge is on.
Be careful how one dismounts this animal, many have done it unsuccessfully.
For a long time I have
been constructing investment portfolios for institutions and individuals, often
using tools that David Rubenstein credits George Washington with as his
inventions. One of our readers, a professional portfolio manager has asked how
we would construct our time series portfolios. Thus this week I will outline,
in many ways the single most important of the portfolios, the Operational Portfolio.
All of the time span
portfolios should be viewed as platforms that within their bounds can have
aggressive or defensive positions or some combination of them.
Great portfolios are
the results of the interplay of science or if you will, numbers and ratios as
well as future-oriented judgments. All great artists be they musicians,
sculptures, or painters use both schools to reach the desired result.
The Operational Portfolio
is designed to meet the current year’s estimated spending requirements and a
reasonable guess as to the following year’s needs. In all likelihood these
needs will consume all of the capital and income of the portfolio. Even under
the best of circumstances surprise demands for spending will occur. Thus all
investments in the Operational Portfolio must have weekly, if not daily
liquidity and therefore should be reported weekly to the authorized spenders.
Because of liquidity concerns at least half of the portfolio should have stop
loss orders or similar arrangements, such as “Good ‘til Cancelled” (GTC) which should be
monitored at least weekly.
Clearly this Operational
Portfolio is critical to the current needs of the beneficiaries. One can assure
more comfort to these spenders and their guardians by increasing the size of
the portfolio. However, any increase in size of the Operational Portfolio will
decrease the capital to be invested longer-term at higher returns. This may
well be the place where George Washington’s type of skills are needed to
produce the most effective compromise for the good of the whole effort.
I have said that these Timespan
portfolios are platforms which can be populated with various combinations of
aggressive to defensive securities. The defensive issues could include US
Treasury Bills of various maturities, insured deposits of sound banks and the
highest quality portfolio of commercial paper. The aggressive securities could
include short-term loan participation portfolios, some broadly based index
funds and perhaps some ETF-like vehicle that has a larger mutual fund (which
could provide liquidity to the ETF if there was a redemption run on the ETF)
and Foreign US dollar pay or hedged short-term foreign treasuries. Populating
the specific portfolio for the client is where the art form will shine.
The other three Lipper
time span™ will be discussed in future posts.
Question of the week:
Do you see signs of a surge?
__________
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Copyright © 2008 - 2015
A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.
All Rights Reserved.
Contact author for limited redistribution permission.
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