"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years" - Warren Buffett
When it comes to financial security, one could argue that the chairman of the Federal Reserve Board of Governors would be a great role model to emulate. As an obligation of duty, the chairman and all members of the board are required to disclose their assets and income to the U.S. Office of Government Ethics.
U.S. President Barack Obama made it clear that when Ben Bernanke's second term expires on 1-31-2014, there will be a new chairman of which current Vice Chairman of the Board of Governors, Janet Yellen, is the current front-runner. By analyzing their respective investment portfolios, one can gain insight into astute money management techniques as well as their individual stock selections.
On February 1, 2006, Ben Bernanke was sworn in as a 14-year term member of the Federal Reserve Board of Governors, as well as Fed Chairman, which was a 4-year term. U.S. President Bush appointed him just before the beginning of the Global Financial Crisis, where Bernanke, along with U.S. Treasury Secretary Henry Paulson and the president of the Federal Reserve Bank of New York Timothy Geithner organized the economic bailout that arguably sidelined a global depression.
On September 24, 2013, The Goldman Sachs Group, Inc. (GS), released a statement proclaiming they expect President Obama will "nominate Janet Yellen to be the next Federal Reserve Chair and we expect the announcement to come soon. However, this week's political calendar may be too crowded to make an announcement. Assuming a government shutdown is avoided, an announcement could come as soon as early next week."
As we are currently in the second week of a government shutdown the announcement has certainly been delayed. It is likely that Yellen will be nominated once the government resumes and in this regard, analyzing her holdings could give investors a head start on what could be very public news in the short term.
Part 1: The Myth
As many investors know, the one stock Ben Bernanke held in his portfolio when he was nominated for the Fed chairman position in 2005 was Altria Group Inc. (MO). What most people don't realize is that MO was just a minor part of Bernanke's portfolio, only amounting to a total of between $1,001 and $15,000. He sold the stake in July 2004, and as of 2012, no longer owns any individual stocks.
Part 2: The 2012 Bernanke Portfolio
Bernanke's disclosed investments, excluding his primary residence, are spread between professionally-managed funds and cash accounts. Below are pages 3-4 of Bernanke's 2012 OGE Form 278 [pdf] (dated 3-7-13, released August 2013) listing his investment assets held as of 2012. Note that for each asset Bernanke must claim a range of valuation rather than an exact dollar amount.
As noted above, Bernanke's holdings are largely annuities, with minor investments in stock and bond funds and a conservative balance of cash and Treasuries. By using the mean value, or midpoint of the range of each holding, one could calculate what the asset allocation of the Bernanke portfolio would look like (with of course a margin of error).
When using the midpoint range values given on the OGE Form 278, Bernanke's holdings are estimated to be near $1,670,000 but are listed in a range of $1,065,000 to $2,275,000.
In viewing the mean percentages of each asset class in his portfolio, Bernanke is clearly an income-oriented investor looking for minimal risk, access to cash and very limited exposure to market swings. His hand shows only approximately 1% allocation to domestic and international stock funds and a 2% allocation into a high-yield bond fund.
Part 3: The 2012 Yellen Portfolio
Janet Yellen holds a portfolio that is less conservative than Bernanke. Focusing on her disclosed investment securities and cash balances, Yellen's portfolio is worth approximately $8.8 million using the midpoint range values. Her 2012 OGE Form 278 lists her asset range to be somewhere between $4,749,000 and $12,885,000.
In approximating her asset allocation, Yellen's assets are close to 64% stock and stock funds, 29% bond funds, 5% cash and only 2% in annuities.
While Yellen does hold nine stocks, the percentage of portfolio weight is minor at approximately just over 2%. Her investment preference is to purchase funds, whether stock or bond funds. The funds she currently favors are with Vanguard and Fidelity.
Portfolio Insight: Ben Bernanke versus Janet Yellen
While Bernanke is a bit of an investment bore with his 90% allocation to annuities, Yellen clearly favors exposure to the market. Her portfolio estimate of nearly 64% allocated to stocks illustrates this preference.
The Yellen portfolio favors index funds with very low expense ratios. Her largest holding, Vanguard Tax Managed Growth and Income Fund (VTGLX), basically mirrors the S&P 500. Yellen's top five holdings that invest in equities are all Vanguard index funds, which are known for their low cost of ownership.
Yellen does have nine equity holdings, which are more interesting than Bernanke's sole holding of Altria that he sold before his nomination to become chairman in 2005. Yellen's individual stock selections, however, are meager in size compared to her total investment portfolio.
Yellen's top three stock holdings in 2012 were ConocoPhillips (COP), Pfizer (PFE) and E. I. du Pont (DD). PFE and DD are both components of the Dow Jones Industrial Average, while COP is a popular oil & gas major with a market capitalization of over $86 billion. All three companies can be classified as dividend-value plays, as they all contain dividends above 3%, low-growth (versus the S&P 500 5-year growth forecasts) and a lower P/E than the general market.
By noting that both Ben Bernanke and Janet Yellen hold a majority of their investments in diversified funds, it can be noted that individual stock-picking is less desired but that stock exposure at some level is required. To mirror the current and likely future chairman of the Federal Reserve Board of Governors, one could buy low-cost index funds for stock exposure.
Bernanke's allocation showcases a preference for a conservative approach with allocations toward income-oriented and low-risk investments, which can be understood as he has likely earned enough stress playing hero in the Global Financial Crisis. Annuities, bonds and cash are a suitable portfolio for the income-investor.
Yellen prefers direct market risk, which could be a very strong signal that she believes in the current bull market as well as the domestic and global economies in general. She shows preference for low-cost index funds that offer broad exposure to both domestic and international stocks.
For Yellen to be yelling about so many stocks the investor must be curious. While holding a larger asset base than Ben Bernanke, we can only assume that she wants to add some spice to her portfolio, albeit at a very small risk.
Both Bernanke and Yellen hold at least one bond fund. Bernanke owns only one high-yield bond fund to complete the approximate 2% portfolio allocation his portfolio holds in bonds. Yellen on the other hand holds an approximate 29% weighting, which she diversifies between four funds with the following alternate objectives: corporate investment-grade, short-term, intermediate-term and high-yield bonds.
In short, our current and (likely) forward Fed chairs tell us the following:
- Low-Cost Index Funds Are The Top Choice for Market Exposure
- Income with Limited Risk is Okay for Retirees
- Individual Stock-Ownership Plays a Minor Role in Allocations
- Diversification is Key in Portfolio Asset Allocation
- Bonds Play a Role in Income Portfolios