We Made Several Major Adjustments to Your Portfolios This Quarter:
Added to Other Cyclicals
Initiated with Clean Energy
Trimmed Gold (We still like the inflation hedge)
Swapped our MedTech Holding
We made several adjustments to your portfolios this quarter. The most notable was the beginning of a transition out of technology into other cyclicals. While we have reduced our cash position slightly over the past quarter, we are still keeping cash levels higher than normal in the near-term, as we work through election uncertainty and concerns of rising COVID cases heading into Fall/Winter.
The stock market, like the economy, has seen its share of “V” and “Swoosh” participants. For example, the S&P 500 index was up about 6% YTD through September 30. The NASDAQ index, which is technology heavy was up 25% (“V”). Meanwhile the S&P 500 industrials index was down 4% YTD (“Swoosh”).
We believe that as we get closer to a vaccine, mitigation efforts improve, and treatment options become more available, that stock market beneficiaries will broaden out from technology winners to other cyclical winners. Thus, this quarter we trimmed several tech stocks and purchased other cyclicals.
We took initial investments in two clean energy stocks. From a socio-economic perspective, we believe that the trends supporting clean energy are here to stay as demand from corporations, governments, and consumers is increases and the cost of the technologies decline. In addition, Biden’s proposed infrastructure plan includes a significant focus on clean energy. If he wins the election and there is a Democratic sweep, we anticipate even more investment in this area.
We sold an investment that we have held for at least 10 years. We liked the company for its diversification, inflation hedge, and income. During the depths of COVID, the company suspended its dividend. Because income was a large portion of our investment thesis, their action during COVID was concerning to us. Thus, when the stock price recovered to pre-COVID levels, we decided to sell.
We trimmed gold. Last quarter gold was the largest holding in your portfolios, at over 5%. Gold rose significantly in early August, and we took the opportunity to trim allocations to 3.5%.
Many Secular Trends Remain in Place
We swapped our medtech holdings. Our original medtech holding was a great investment for us. However, the company had some manufacturing issues, and we felt that their COVID new product response was underwhelming. Thus, our risk/reward outlook was less favorable, and we sold. We subsequently purchased another medtech company. Over the past several years, their relative growth rate vs. peers has been low, and they were losing market share. However, in 2019 they brought in a new CEO to accelerate change, and they are now on the cusp of one of the largest new product launch schedules in their history. They have 4-5 new products that could each be multi-billion-dollar businesses. One of the highlights is their upcoming robotic surgery launch in 2021. Unlike many of its peers, valuation multiples are not stretched, the balance sheet is strong, and they pay a 2% dividend.
Many secular trends remain in place and have even accelerated with COVID. We have highlighted some of the trends below.
- Electronic Payments
- Electric Cars
- Infrastructure Spending/Onshoring
- COVID Testing/Treatment
- Online Retail
Low Interest Rates Make Dividends More Valuable
The dividend yield on our model equity portfolio is currently around 2.1%. This compares with the S&P 500 dividend yield of 1.8%, and the US Treasury 10-year yield of 0.7%. Given our focus on conservative portfolios, we tend to invest in large cap companies with strong balance sheets. Many of these companies pay a dividend. With interest rates very low, the value of this income only increases. Approximately 30% of the companies in your portfolios have dividends greater than 2.5%. Going forward, with interest rates so low, we will put more weight on dividend yield when considering adding companies to our portfolios.
We Added Clean Energy to Our Mutual Fund Portfolios
Our conviction on clean energy is high and we added it to our multi-asset class mutual fund portfolios. We purchased a clean energy ETF – to represent 3.5% of the equity allocation. In emerging markets and international funds, we changed our strategy early this year to be 50% index and 50% actively managed funds. Our actively managed funds outperformed.
Yield Is a Scarce Commodity
Yield is so very hard to find. Currently the yield on 5-year investment grade corporate bonds is under 1%. We purchased fixed income for safety as well as income. Thus, despite the low yields we do not want to add more risk. We are keeping our duration short and credit quality at investment grade. However, in the equity side of allocations, we are working on increasing the dividend yield of the portfolios. For those with the appropriate risk allocation we are looking at alternative investments that provide income.
We look forward to speaking with you soon and thank you for entrusting us with the management of your money.