When I launched my second model, the Conservative Growth/Balanced Model Portfolio, in July of 2008, I shared the names and the philosophy behind it in a series of articles. You can visit the last one and backtrack to the rest. I shared an update in May 2009 and my most recent one about six months ago. Today, I want to share all of the current holdings, like I did for my Top 20 Model Portfolio a few days ago, as well as some overall portfolio structure.
2010 was a good year for the model, with the total return of the model beating its benchmark (60% stocks and 40% bonds) by over 15%, with a return of almost 27%. Our models were underweight bonds in the back half of the year and overweight stocks. As a reminder, the model is subject to several rules: Stocks vary between 45% and 75%, bonds (we use ETFs only) vary between 10% and 50% and cash can be 0% to 45%. We carried a lot of cash during the year - that wasn't fun!
Before I share the current names and structure, I want to say that we have a pretty tough task with this model. On the one hand, we want to grow our principal and produce income above the S&P 500. On the other hand, though, I am charged with protecting from capital loss. It's the old adage: Make me money but don't take any risk!
Ok, here is what the model looks like currently. We recently took our equity exposure down from 75% to about 67% as the year neared an end. Many of our names were extended (protect the principal at play!). Our bond exposure, currently 19%, has increased from its minimum recently. We have most of our exposure in the ETF iShares Barclays Aggregate (NYSEARCA:AGG), but we have some in the iShares Barclays MBS Fund (NYSEARCA:MBB), which is the mortgage portion of the index. So, we remain quite underweight. The balance of the model is in cash (14%). I hope to redeploy that into stocks in the coming weeks and quite possibly into additional bonds (but no more than 25%) should the opportunity arise.
Here are our current stock holdings:
- Applied Materials (NASDAQ:AMAT)
- C.R. Bard (NYSE:BCR)
- Franklin Resources (NYSE:BEN)
- Cal-Maine (NASDAQ:CALM)
- Chico's (NYSE:CHS)
- Cisco (NASDAQ:CSCO)
- Chevron (NYSE:CVX)
- Flowers Foods (NYSE:FLO)
- Johnson & Johnson (NYSE:JNJ)
- Lowes (NYSE:LOW)
- Met-Pro (NYSE:MPR)
- National Bankshares (NASDAQ:NKSH)
- Owens & Minor (NYSE:OMI)
- Portland General (NYSE:POR)
- Walgreen's (NYSE:WAG)
- Xilinx (NASDAQ:XLNX)
Not all of the positions are the same size - you can find out our weightings by signing up for a free trial. Unlike my Top 20 Model Portfolio, which is 31% Industrials and 29% Technology, we take a more balanced approach in CG/B. The 67% in stocks is allocated 23% Technology, 21% Healthcare, 19% Consumer Staples, 13% Financials, 10% Consumer Discretionary and 5% each to Industrials, Utilities and Energy. That's 8 out of the 10 sectors (no Materials or Telecom Services, both of which are very small parts of the S&P 500).
In terms of market caps, we have some Small-Cap exposure, but it's not as extreme as Top 20. Our median is over $8 billion, with an average of over $42 billion. We do have 2 names that are below $200mm and another below $1 billion. The median PE ratio is about 14X, with the portfolio-weighted PE at 13.7X. Our dividend yield is about 2.2%, which is above the market. Our balance sheets are very strong, with the median company having just slightly more debt than cash. Even our portfolio-weighted net debt to capital is just 8% compared to about 30% for the S&P 500. 1/2 the names have more cash and short-term investments than debt, and, if one includes long-term investments, then the vast majority are net cash positive. Like Top 20, our stocks aren't run-up as much as the market. On a portfolio-weighted basis, our stocks that we currently hold advanced 2.4% in 2010.
I hope that the very conservative nature of this portfolio is evident from the characteristics I described. We have good economic sector diversification, exposure to a very broad range of market capitalizations, strong balance sheets and moderate average underperformance over the past year. A few of the names are currently overbought (5 moderately and 1 significantly) - hence the recent throttling back of our exposure. My goals in this portfolio are to beat the combined index by 8-12% a year. It's less than my goals for Top 20 due to the fact that we don't really add any value in our bond selection (we index) and that our opportunity set is smaller (stocks have to be "conservative"). As a reminder, we should expect to fare best relatively in down markets, to do ok in flat markets and to lag in strong markets. Thus, I was very pleased with 2010's performance. We had good stock selection, but it was our avoidance of bonds and commitment to stocks above a neutral exposure that contributed as well.
Disclosure: Long CSCO and CHS