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Medium-term horizon, long/short equity, research analyst, portfolio strategy
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In my previous article of late September, I presented a portfolio which was based on positive mean return and low volatility. That portfolio performed adequately against ETFs such as SPLV which are based on similar parameters. The comparative active returns are shown in the following graph.

click to enlarge

One consequence of low volatility investing is that portfolios do not require a high turnover to remain current. Trends should be more stable and outperformance is likely to be measured in small percentage gains and be persistent.

For the start of 2012, the "Evolving Portfolio No. 6" has the historical profile shown below. Basically it has picked up around 2% of active return in the past month.

Stocks comprising this portfolio are:

TJX

TJX Cos

Apparel Retailers

VFC

VF Corp

Clothing & Accessories

IBM

Int. Business Machines

Computer Services

PGN

Progress Energy

Conventional Electricity

XEL

Excel Energy

Conventional Electricity

PNW

Pinnacle West Capital

Conventional Electricity

TSS

Total Systems Service

Financial Administration

SE

Spectra Energy

Gas Distribution

AVA

Avista Corp

Multiutilities

AFG

American Financial

Property & Casualty Insurance

MCD

McDonald's Corp

Restaurants & Bars

YUM

Yum! Brands

Restaurants & Bars

PM

Philip Morris

Tobacco

MO

altria Group

Tobacco

MAT

Mattel Inc

Toys

I have reviewed these stocks on the SA website. There aren't any dark horses here. Most have very favorable mentions as stocks loved by hedge funds, or with good valuation metrics or strong dividends. That amounts to a lot of praise for limited gains.

WHAT DO THE INDICATORS INDICATE?

Regime switching as between stocks and bonds (SPY and TLT) has received some comment on the SA site. I have combined this with a market turbulence indicator as shown below.

Basically, when the SPY/TLT indicator turns negative, then the switch should be to equities and indeed, higher risk equities. When market turbulence is high, consistent returns from equities is problematic.

The indicators suggest that the switch to equities is now on. However, unlike the situation in August 2010, market turbulence has not diminished to comfortable levels. Therefore, consistent returns from stock picks are still likely to prove elusive for the moment.

A BIT MORE SPICE

Nevertheless, in keeping with moderated risk taking, I have formed a portfolio which has exhibited reduced downside risk (as compared to SPY), and increased upside potential. Essentially, a portfolio of stocks with more exciting stories and possibly higher profit potential.

The active return of the portfolio is shown below.

And, the stocks comprising this portfolio are:

HS-OLD

Health Spring

Health Care Providers

GMT

GATX Corp

Business Support Services

EP

El Paso

Pipelines

BGS

B&G Foods

Food Products

FTK

Flotek Indust.

Oil Equipment & Services

LIZ

Liz Claiborne

Clothing & Accessories

PXP

Plains Exp.

O&G Exploration & Production

EXR

Extra space Storage

Specialty Real Estate Investment Trusts

HUM

Humana Inc

Health Care Providers

OKE

ONEOK Inc

Gas Distribution

SAM

Boston Beer

Brewers

TGX

Theragenics Corp

Medical Supplies

PM

Philip Morris

Tobacco

GPI

Group 1 Auto

Specialty Retailers

AJG

Arthur Gallagher

Property & Casualty Insurance

Having identified this portfolio, I have once again gone through SA to find references to these stocks. Categorization is difficult, but several have been mentioned in relation to hedge fund holdings, one by Cramer, one from insider buying and one from options activity. The remainder appear to have been mentioned on the basis of positive profit/business outlook.

There is a stark difference in active return as between a low volatility portfolio and one with upside potential. It is sufficiently large to be worth chasing, even in the current market.

Source: Evolving Portfolio (Number 6): Quiet But Active