Brint Detwiler is founder of Wilmington, Delaware based independent advisory firm Barnstone Advisors LLC. Seeking Alpha recently had the opportunity to ask Brint about his current asset allocation and perspective on opportunities in this market.
How are you currently allocating among asset classes in your portfolios?
To a large extent, each of our client portfolios is customized to meet the objectives and stated risk tolerance of each individual client, but in the aggregate we are currently 50% in equities, 40% fixed income and 10% to alternatives.
Our equity instruments reflect our clients' strong desire for current yield in this environment and our emphasis on dividends as a significant contributor to overall returns. Based on our belief that equity returns will be muted in the foreseeable future, the cash flow produced from dividends is a self-replenishing reservoir of “dry powder” from which we can make tactical moves based on the best opportunities available in the market.
Speaking of being nimble and liquid: our approach to alternatives is reflective of our clients' desire to participate in these asset classes but in a way that eliminates some of the risks that they found themselves exposed to during the recent crisis in their traditional private equity and real estate limited partnership investments.
Through the use of publicly traded funds, ETFs and MLPs, we can capture the desired yield, participate in upside growth and achieve liquidity absent the burden of lockup periods and the value uncertainty of unmarked assets. All of this at a fee structure that is extremely competitive in comparison to the typical hedge fund or private equity shop.
Our fixed income portfolio is a selection of individual issues, funds and ETFs emphasizing quality and shorter durations. No doubt, we are less enthusiastic about this space than we were one year ago when opportunities were present across the board and inventory was more plentiful and pricing more attractive.
We are fully cognizant of the risk tradeoffs among the three instruments we have in play as it relates to interest rate sensitivities in a rising rate environment and we are monitoring the portfolio closely with this in mind. The “sweet spot” in fixed income is becoming ever smaller, but on the other hand we are of the mind that fed action is still 12–18 months away.
What asset class do you feel will perform best in 2010 and what ETF do you choose to capture that?
As asset allocators, emphasizing an holistic approach to wealth management, we are not prone to making outsized bets on single securities or sectors, but no doubt our current thinking informs our weightings in various asset classes.
An ETF that we currently use extensively in our portfolios is SDY ( the SPDR Dividend ETF). This particular dividend ETF tracks the S&P High Yield Dividend Aristocrats Index – the 50 highest yielding stocks in the S&P 1500 with a 25 year history of increasing dividends. Through SDY we achieve a number of objectives in one instrument.
- Allocation among cap sizes and styles
- Small to Mid-cap value tilt - consistent with our view of where the best long term opportunities lie.
- Yield with a modest allocation to financials – a sector to which we maintain a cautious stance.
From a broader perspective, we believe 2010 will be another good year for the small cap value space as evidenced by its already strong start of approximately + 2.8% YTD.
We use other funds and ETFs to directly target this space, but SDY, as opposed to other options emphasizing dividend yield (i.e. VIG – Vanguard Dividend Appreciation), allows us to keep “our toe in the water” of the small cap value space and capture yields in the 4% range. This is an especially useful instrument for the older client who needs the yield but whose exposure to the more volatile small cap value space needs to be limited and closely monitored.
What instruments do you generally use to capture particular asset classes?
We are increasingly moving towards the use of ETFs to gain exposure to particular asset classes, motivated by all of the well-known benefits of these instruments over most mutual funds (tax efficiency, transparency and cost). While there is a rapidly increasing selection of ETFs with some very appealing features with respect to their construction and how they are targeting a particular sector, geographical focus, industry etc., we tend not to be an early adopter of these instruments as we like to see a solid trading history, assets north of $25 million and consistent pricing relative to NAV.
All of this is to say that as more ETFs reach this stage of maturity, we will be looking more closely at them as alternatives to traditional mutual fund selections.
An area where we have made the switch to ETFs most extensively is in fixed income. This is driven by a number of factors, but primarily by our desire to remain nimble in an interest rate environment that has a higher than normal degree of uncertainty, given the extraordinary government actions of the last few years. And the simple fact that rates have only one way to go – up!
Lately, fixed income ETFs have become the default choice, as we have not been able to find a sufficient supply of individual issues that meet our price, credit and yield criteria. Specifically, we have been buyers of the MUB (iShares S&P National AMT-Free Municipal) and the PZA (Powershares Insured National Municipal Bond) ETF. These 2 products allow us to create the desired weighting towards interest rate and credit risk in a client portfolio.
Additionally, the ETF approach to this space minimizes the specific issue risk that we are very mindful of, given the declining fortunes of many municipalities across the country.
Have any new instruments emerged in the past few years that you’ve adopted in your portfolio construction?
Giving equal time to our mutual fund providers, Dimensional Fund Advisors introduced a compelling bond fund selection last year in DFEQX (DFA Short-Term Extended Quality Portfolio). With DFA’s characteristically low cost approach, this fund provides broad exposure to both US and foreign, corporate and government debt instruments. It maintains a relatively short duration of less than 3 years and the managers have the flexibility to shift their weightings across the investment grade universe when they deem the risk/reward warrants such a move. The type of instruments employed also covers a wide range across the universe of government and private obligations. Lastly, the fund hedges foreign currency exposure, yet another attractive risk management feature of this fund.
We have used this instrument extensively to cover our short-term and World Bond sleeve since it was introduced about 1 year ago and we have been very pleased with the result – a 300+basis point return premium over the Merrill Lynch US Corporate and Government Index 1-5 years.
Finally, I will mention that we are watching closely the very recent introduction of the iShares ETFs that target specific end-date sleeves of municipal bonds (MUAA, MUAB, MUAC, MUAD, MUAE, MUAF). I also understand that similar products are on the horizon for corporate debt. The creation of a fixed income ETF product that has an actual maturity date and therefore allows for more precise asset-liability matching in the creation of client portfolios is very intriguing.
Following our aforementioned philosophy towards ETF introductions, we will wait for these new issues to “grow up” a bit before investing.
Thank you very much, Brint.
Disclosure: Barnstone Advisors LLC is long SDY, VIG, MUB, PZA in client accounts
If you are a fund manager and interested in doing an interview with us on your highest conviction stock holding, please email Rebecca Barnett.