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As 2009 has come to a close, it’s time to take a look at the Against the Sky Portfolio, check its performance, and test its asset allocation. Overall, I’m pleased with the performance of the portfolio, but in my search for value, I suspect that I’ve drifted from its original intent.

Returns

In 2009, the net asset value (NAV) of the Against the Sky Portfolio increased from $7.02 to $9.40, a 33.9% return. This compares to a 25.2% return for the S&P 500 (SPY). Since inception, the portfolio was down 6.0% at year end. Since inception of the portfolio, the S&P is down 13.1%.


Against the Sky Performance as of 12/31/09

Portfolio Goals

As noted in my original post regarding this portfolio, the goal is to gain a 24% yield on the initial portfolio value after ten years. Obviously there is no way to achieve these yields without taking on a large amount of risk. I could have invested the entire portfolio in Lexington Realty Trust (LXP) earlier this year near the company’s 52-week low, but doing this would not have been prudent given the risks in commercial real estate. So, if I’m to achieve the goal of this portfolio I’m going to need some growth as well as current income.

Diversification and Asset Allocation

My initial plan was to invest 60% of the portfolio in mid-cap and large-cap companies that have the potential for a growing dividend. This is not a hard and fast rule, however. My investments in Apple (AAPL) and Markel (MKL) have been made based on growth potential as it is unlikely that either company will pay a dividend in the near future. Despite these exceptions, the goal really is to invest this portion of the portfolio in dividend growth-type companies.

The portfolio still needs some growth, so I planned to invest 20% of the portfolio in small companies. This is my favorite asset class, but one of the primary goals of the portfolio is not to lose money. Risks are to be measured in this portfolio. I want to make sure I’m getting the most out of this 20% allocation.

Because investing internationally is a necessary portion of any asset allocation plan these days, I’ve designated 10% of the portfolio for a global bond fund and 10% for an international stock fund. While I’ve invested in companies like Ctrip (CTRP) and Baidu (BIDU), this is certainly not my area of expertise. I rely on those more proficient than me to handle this portion of the portfolio.

Looking back on 2009 and the performance of various markets in general, it’s amazing to me just how widespread the economic downturn has been. I designed the portfolio allocations hoping to spare some portion of the portfolio in a downturn, but through the credit crisis every portion of the portfolio declined. Permanent losses were limited, but the portfolio was much more volatile than I expected.

As the portfolio progresses, it will be necessary to move the portfolio to more stable investments and increase the fixed-income allocation.

Current Holdings

Below is a table of current holdings within the portfolio.


Security Ticker Portfolio % Return
Lexington Realty Trust LXP 8.16% 103.22%
Markel MKL 5.66% 0.24%
Proctor & Gamble PG 5.22% 20.48%
CapitalSource CSE 4.80% -29.23%
ADP ADP 4.34% 8.89%
Middleby MIDD 4.19% -4.21%
Apple AAPL 3.44% 35.30%
Chipotle CMG.B 3.30% 27.12%
Assurant AIZ 3.29% 2.43%
Intel INTC 3.23% 3.42%
InVentiv Health VTIV 3.02% 1.22%
RGA RGA 3.00% -2.60%
Jones Lang Lasalle JLL 2.85% -6.22%
Genessee & Wyoming GWR 2.60% -0.18%
Under Armor UA 2.17% 7.32%
Frontier Communications FTR 2.07% -31.63%
Duke Energy DUK 2.05% -7.37%
Otter Tail OTTR 2.05% -32.43%
Dawson Geophysical DWSN 1.79% -46.71%
Smartpros SPRO 1.36% -8.01%
Manager's Global Bond MGGBX 8.94% -12.36%
Harbor International HIINX 8.95% -12.25%
Cash 13.53%

I’m not sure what to make of this. In general, I’ve tried to focus the portfolio on my best ideas, but I suspect my allocations have gotten out of whack in the process. I think it’s important to take a look at each investment and how it fits into the portfolio. The mutual funds in the portfolio are at the correct allocations. Let’s look at the 60% to be allocated as large cap and mid cap income growth and the 20% allocated to small cap growth.

Income Growth

Below is a table of holdings I currently consider large and mid-cap holdings:

Security Ticker Portfolio % Return
Lexington Realty Trust LXP 8.16% 103.22%
Markel MKL 5.66% 0.24%
Procter & Gamble PG 5.22% 20.48%
ADP ADP 4.34% 8.89%
Apple AAPL 3.44% 35.30%
Assurant AIZ 3.29% 2.43%
Intel INTC 3.23% 3.42%
RGA RGA 3.00% -2.60%
Jones Lang Lasalle JLL 2.85% -6.22%
Frontier Communications FTR 2.07% -31.63%
Duke Energy DUK 2.05% -7.37%
Otter Tail OTTR 2.05% -32.43%
Total 45.36%

First, I note that I have not fully funded this allocation as it stands at 45% of the portfolio. Second, I note that there are some difficult classifications here.

Lexington Realty Trust, which currently comprises over 8% of the portfolio, does not really qualify as an large or mid cap company. Still, I expect that REITs will comprise a portion of the portfolio, say 20%, when it converts to more of an income based portfolio. For now, I believe the company represents a good value despite what is going on in commercial real estate right now. At over 8% of the portfolio, it may be necessary to reduce exposure over the next several months. I will likely look for other REITs to diversify a bit.

Otter Tail is also not technically a mid or large cap company. Still, its primary business is as a utility. This provides stability and less risk, especially at the current price. It should really stay in this category.

Over the next quarter, I will be working to invest the cash held in the Against the Sky Portfolio in large-cap, dividend paying companies.

Small Cap Companies

While the allocation for large and mid-cap companies is under funded, the allocation of small cap companies within the portfolio is too high.

Security Ticker Portfolio % Return
CapitalSource CSE 4.80% -29.23%
Middleby MIDD 4.19% -4.21%
Chipotle CMG.B 3.30% 27.12%
InVentiv Health VTIV 3.02% 1.22%
Genessee & Wyoming GWR 2.60% -0.18%
Under Armor UA 2.17% 7.32%
Dawson Geophysical DWSN 1.79% -46.71%
Smartpros SPRO 1.36% -8.01%
Total 23.23%

I also wonder if some of these companies are growing too slowly or lack potential for share appreciation. In general, I’d like to invest in companies that have the potential to double within three years. The allocation of this portfolio is limited, so I’d like to find companies that have the greatest potential for strong returns. I will have to sell some shares within this category over the next quarter.

Conclusion

Over the next quarter, I will be adding more stable large cap companies to the portfolio and reducing exposure to smaller companies. As part of the reduction of the smaller companies, I will likely be focusing on my best ideas. The portfolio has performed well over the past year. I expect the market to trade sideways for most of 2010, so allocating to large dividend payers may be the best source of returns. The general strategy of this portfolio requires me to do this, but it will likely lead to better performance as well.

Disclosure: I have an interest in all of the companies mentioned above

Source: How I'm Repositioning My Portfolio for 2010