Building a 'Not Permanent' Portfolio

by: Roger Nusbaum

A few days ago I disclosed buying the Global X Nordic 30 ETF as part of swapping out of Australia (for "small" accounts we sold Aussie ETFs and bought GXF and iShares Canada for "large" accounts the Australian exposure has not yet been replaced). For these small accounts, we used Australia as a proxy for foreign developed because aside from liking Australia we want no part of Japan or Big Western Europe and the broadest index funds are heavy in those countries.

As I mentioned, Australia was a very long term hold (we'll be back in one way or another for large accounts soon) but I felt a change was needed (click through for the rationale) but still wanted to avoid Japan and Big Western Europe.

Depending on the client, they'd had EWA since 2004. That is a long time; seven years is almost permanent. Scandinavia has been a region that I have been favorably disposed to and heavy in the portfolio for quite a while and as I would prefer to keep turnover low and 30-40 positions in a small account remains prohibitive, I hope to be able to keep GXF for a very long time as well -- maybe almost permanently. If something sours or if I believe that something has soured, I won't hesitate to sell it -- but hopefully that does not happen.

This got me thinking about an alternative to the permanent portfolio, as I am not a huge fan of holding on to something come hell or high water. I could not feel good about putting 25% of anyone's money into long term treasuries here; my thoughts are more about not wanting to buy high, as opposed to calling a bond bubble. While I realize prices can stay high for a long time, buying high is buying high. And gold is too volatile in my opinion to get 25%.

I think there might be some middle ground here as not "permanent for the rest of your life," but permanent in the sense of the foreseeable future with a small number of funds -- so inspired by the original, with a willingness to be more tactical as fundamentals occasionally call for it.

With that in mind, I came up with a simple grouping of funds that offer exposures that I think are important with the understanding that while the fundamentals are good now, that may change -- and if it does change, then the grouping would need to change.

Realistically, anybody investing in equities over a long-term time horizon is going to have to have a comprehensively global outlook.

The following quote from Felix Salmon is also relevant:

Realistically, anybody investing in equities over a long-term time horizon is going to have to have a comprehensively global outlook.

Global X Nordic 30 (NYSEARCA:GXF)
iShares Emerging Market Infrastructure ETF (NASDAQ:EMIF)
WisdomTree Australia New Zealand Debt Fund (BNZ)
WisdomTree Managed Futures Fund (NYSEARCA:WDTI)

GXF, GLD and EMIF are client holdings, and BNZ will be switching to the above from the New Zealand dollar fund in June.

No US exposure is different, but the fundamentals at the broad index level stack up poorly against other parts of the world. The combo of GXF and EMIF leans quite a bit smaller than most large cap benchmarks; while I could not find beta info for GXF, the iShares website has EMIF's beta at 0.69.

As for bond exposure, I still very much like Aussie sovereign debt; we own individual issues for clients. I've written about why we own GLD many times, so without repeating that I will say that while I need to avoid mentioning percentage weightings of that grouping, I would never have 20% in gold. WDTI uses the strategy used by the Rydex Managed Futures Fund (RYMFX), which we own for clients and with which we have had good luck.

While talking about percentages is off limits, the idea would be a "normal" allocation to equities, a "normal" allocation to fixed income and then small allocations to gold and absolute return. We don't do the above for anyone; it is just a talking point.

Also, there is plenty that is given up with such a mix, including dividends (BNZ should have a good yield) and volatility (at times you want volatility) -- but I do think it is a good grouping. For people to look at their own portfolios, get them to look under the hood and get in better touch with their portfolio shortcomings.

I would also add that there is some unique thought here that makes use of some innovative funds. Speaking of innovation, yesterday I spoke to execs from two different ETF providers, and while the content of the conversations need to remain confidential, the commitment to innovation and utility is alive and well. There is a willingness to explore more concepts than five years ago.

I made a joke the other day about the China Carpet ETF, and will say that while research is not that granular, the recently-announced filing for the Market Vectors Mongolia ETF (I think the ticker should be KHAN, but they haven't asked me) does show the willingness to innovate.