Dissecting A Pro's Portfolio

IndexUniverse has an interview posted with Steve Hammers from Compass Advisory Group. In it Hammers gives some particulars about how he has allocated client portfolios. I thought it would be useful to dissect his ideas a little. To be clear every approach to portfolio construction and management can be picked on, including mine but it is useful to understand the drawbacks as well as any benefits.

The interview says he uses 15 ETF but does not “break out sectors, styles or specific countries.” US equities are targeted at 17% of the portfolio split between PowerShares Dynamic Market (NYSE: PWC), PowerShares FTSE RAFI U.S. 1000 (NYSE: PRF) and PowerShares Zacks Small Cap (NYSE: PZJ). These are all broad based funds and have generally performed similarly to the S&P 500 over the last year. PRF was heavier in financials and went down a little more earlier on in the bear market and bounced back a little stronger during the rally that started in March. While there is no mention of when these funds were added or their specific weights in the 17%, it would seem that if correlations rise during a decline then owning several different broad based funds like this will not offer any diversification. During the bull phase there probably would be some differentiation.

In foreign developed markets they allocate 14% split between PowerShares Dynamic Developed International Opportunities (NYSE: PFA) and WisdomTree DEFA (NYSE: DWM). It then puts 3% into PowerShares FTSE RAFI Emerging Markets (NYSE: PXH). Again no mention of timing but PFA has done far worse than iShares MSCI EAFE Index Fund (NYSE: EFA). PFA is 35% in financials even after that sector has imploded. It is also heaviest in Western Europe and Japan which might be worse off than the US. DWM is heaviest in financials but only at 21% of the fund and its country make up is similar but it has a much larger 9% weight to Australia. Japan and Western Europe are simply not the right countries to overweight if you are looking for diversification because their economies are similar to the US’ and if their outlooks really are worse then these funds look bad from the bottom up as well.

One last point I’ll pick on is the 8% weight to PowerShares S&P 500 BuyWrite ETF (NYSE: PBP) as a hedge. I own a few shares of PBP personally and for some clients so I think highly of the fund as a less volatile proxy for US exposure but it is not a hedge. It went down less over the last year but only by about 500 or 600 basis points in the face of an enormous decline. Better place to hide? Yes. Hedge? No.

 |  |