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 Cos | Apparel Retailers | |
VF Corp | Clothing & Accessories | |
Int. Business Machines | Computer Services | |
PGN | Progress Energy | Conventional Electricity |
Excel Energy | Conventional Electricity | |
Pinnacle West Capital | Conventional Electricity | |
Total Systems Service | Financial Administration | |
Spectra Energy | Gas Distribution | |
Avista Corp | Multiutilities | |
American Financial | Property & Casualty Insurance | |
McDonald's Corp | Restaurants & Bars | |
Yum! Brands | Restaurants & Bars | |
Philip Morris | Tobacco | |
altria Group | Tobacco | |
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:
Health Spring | Health Care Providers | |
GATX Corp | Business Support Services | |
EP | El Paso | Pipelines |
B&G Foods | Food Products | |
Flotek Indust. | Oil Equipment & Services | |
LIZ | Liz Claiborne | Clothing & Accessories |
Plains Exp. | O&G Exploration & Production | |
Extra space Storage | Specialty Real Estate Investment Trusts | |
Humana Inc | Health Care Providers | |
ONEOK Inc | Gas Distribution | |
Boston Beer | Brewers | |
Theragenics Corp | Medical Supplies | |
Philip Morris | Tobacco | |
Group 1 Auto | Specialty Retailers | |
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
