We recently reviewed the pricing power selections made by Janice Revell from Money magazine. She focused on companies who can ride out these times by virtue of having pricing power. She selected four stocks that had pricing power and were not overpriced.
Sanofi-Aventis (SNY) is a drug company that has the benefit of patent protection and has recently made acquisitions to extend its patent portfolio.
LVMH (LVMUY.PK) sells to the uber wealthy who are more recession proof and recent price rises have not put off its customers.
Caterpillar (CAT) has the benefit of a strong sales and support network to minimize downtime. Downtime is a major cost concern and many heavy industries are benefiting from commodity price rises.
Disney (DIS) may have to sharpen its pencils to get people to visit the magic kingdom but with ESPN firing on all cylinders in sport, it has a very handy network of contributors.
At the end of the article, Revell acknowledged that not everybody wants to own individual stocks and so she listed four funds that are worth comparing.
SPDR Dow Jones Global Titans ETF (DGT): This index fund owns 50 of the world's biggest companies -- the larger companies are going to ride out the storm better and the value of the ETF will reflect this.
Yacktman Fund (YACKX): Co-manager Donald Yacktman focuses on high-quality blue-chip companies with reliable earnings and long-term competitive advantages over their rivals. We will replace this with SPY as the ETF for large cap blend.
SPDR S&P Dividend ETF (SDY): Adding a dividend angle is important as dividends are an important income generator.
The Permanent Portfolio (PRPFX): We have commented many times how this portfolio has performed uncannily well, we will replace it with out ETF implementation.
It will be interesting to compare these funds, the equities and our ETF benchmark of a balanced portfolio of Dividend producing ETFs and we will see how prescient Revell has been.
| Asset | Fund in this portfolio |
|---|---|
| REAL ESTATE | ICF (iShares Cohen & Steers Realty Majors) |
| CASH | CASH |
| FIXED INCOME | TIP (iShares Barclays TIPS Bond) |
| Emerging Market | VWO (Vanguard Emerging Markets Stock ETF) |
| US EQUITY | DVY (iShares Dow Jones Select Dividend Index) |
| US EQUITY | VIG (Vanguard Dividend Appreciation ETF) |
| INTERNATIONAL EQUITY | IDV (iShares Dow Jones Intl Select Div Idx) |
| High Yield Bond | HYG (iShares iBoxx $ High Yield Corporate Bd) |
| INTERNATIONAL BONDS | EMB (iShares JPMorgan USD Emerg Markets Bond) |
- 4 Funds With Pricing Power (see above)-- Total of $10K invested equally in each fund
- 4 Stocks With Pricing Power -- Total of $10K invested equally in each stock
- Retirement Income ETFs Tactical Asset Allocation Moderate -- Above funds using TAA (40% fixed income, 30% for each of the top two asset classes)
- Retirement Income ETFs Strategic Asset Allocation Moderate -- Above funds using SAA (40% fixed income, 12% for each of the five asset classes -- funds selected based on price momentum)
Portfolio Performance Comparison
| Portfolio/Fund Name | 1Yr AR | 1Yr Sharpe | 3Yr AR | 3Yr Sharpe | 5Yr AR | 5Yr Sharpe |
|---|---|---|---|---|---|---|
| Retirement Income ETFs Tactical Asset Allocation Moderate | -4% | -35% | 10% | 76% | 8% | 58% |
| Retirement Income ETFs Strategic Asset Allocation Moderate | -2% | -15% | 11% | 59% | 3% | 12% |
| 4 Funds With Pricing Power (see above) | 4% | 23% | 10% | 48% | 2% | 6% |
| 4 Stocks With Pricing Power | 13% | 45% |
The combination of the different funds perform reasonably well over the short term, they underperform the ETF portfolio over the longer term. This is to be expected as the ETF dividend portfolio has greater diversification.
(Click on charts below to enlarge)
Three Month Chart One Year Chart
Three Year Chart
Five Year Chart
The more detailed analysis and graphs give you a visual view of the volatility. I think that this shows you that there are two different schools of thought and you want to make sure you are in the camp in which you believe.
On one hand, you have the stock pickers who want to understand the businesses into which they are investing and a rationale as to why each of the companies should do well over the event horizon of interest. The four pricing power stocks does that.
On the other hand, you have the asset allocators who believe in diversification across a wide set of markets based on the belief that it is impossible to predict who will do well and who will do badly. The fund selection are not diversified in terms of asset classes (except through the permanent portfolio) and so it is an ineffective hybrid. Best to stick to one type of the other.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Disclaimer: MyPlanIQ does not have any business relationship with the company or companies mentioned in this article. It does not set up their retirement plans. The performance data of portfolios mentioned above are obtained through historical simulation and are hypothetical.
