After the carnage that occurred in the equity markets over the last two weeks, I thought it would be interesting to check in with investors and compare portfolio performance. I'm very heavy on equity with most of my bond exposure coming through a mortgage REIT. I'm also contemplating adding more to the mREIT allocation after the severe beating they took.
During the last couple weeks we saw international ETFs sell off hard, domestic equity sell off pretty hard, bonds rally, and mREITs get crushed despite having bond portfolios.
When you look at my holdings, you may notice some massive overlap. This is simply a function of having accounts with different brokerages.
My holdings are demonstrated in the table below:
Name of Fund
Vanguard Total Stock Market ETF
Fidelity Spartan® Total Market Index Fund Fidelity Advantage Class
Fidelity Spartan® 500 Index Fund Fidelity Advantage Class
Schwab U.S. Broad Market ETF
Schwab U.S. Dividend Equity ETF
Fidelity Spartan® Real Estate Index Fund Fidelity Advantage® Class
Vanguard REIT Index ETF
National Retail Properties
Schwab International Equity ETF
Schwab International Small-Cap Equity ETF
Phillip Morris International
Cash in my investment portfolios
Some of those funds did substantially better than others and I put together a few graphics to demonstrate the weightings. These are the weightings at their value entering the year with one exception. I was holding shares in the Schwab U.S. REIT ETF (NYSEARCA:SCHH) which I sold early in January to fund a purchase for STORE Capital. The relative value movements have not been substantial enough for me to be concerned about adjusting for the timing of the swap between the two assets. I used all of the cash from selling SCHH to fund my buy in STOR, so the weightings were not changed.
That put my allocations at roughly 58% to domestic equity, 25% to domestic equity REITs, 6.7% international, 8.7% mREITs, 1.5% to a mining and oil company that destroys wealth at an astonishing rate, and half of a percent to cash. Rounding errors will be present if you attempt to add those values.
To assess the movements in my portfolio, I ran the change in dividend adjusted close for each of those tickers. I also added in the S&P 500 (NYSEARCA:SPY) for comparison. The values in the table are all positive, or zero. I would have shown declines as negative values, but it seemed pointless since there were absolutely zero securities that were up.
I already admitted that FCX is the great wealth destroyer, so let's move past that part. I created a small allocation in FCX the same way most investors did. Start with a larger allocation and watch management run the company into the ground.
To find the total impact on the portfolio, I can simply multiply the allocation percentage by the decline percentage.
This may seem like an extra step to some investors, but it is interesting to note some of the results. By adding up all the values in this table I can find that the total portfolio should be down by 7.82%. For a portfolio that is purely equity, losing less than the S&P 500 when international indexes declined even harder is a pretty solid performance.
Lessons From Portfolio Performance
The investments in my portfolio that declined the least (green chart) were NNN, MO, PM, and STOR. I picked up MO and PM precisely because I believe big tobacco is occupying an excellent space in the consumer staples sector that would allow it keep on growing even if the rest of the economy was tanking. There seem to be three logical strategies for an expensive market. One is to dollar cost average in because timing the market is inherently problematic. Another is to simply refuse to buy until the prices become more attractive. The third option is to focus on buying companies that can withstand a downturn in the economy. I have primarily been using the first and third option.
It is also interesting to see that STOR and NNN thoroughly beat the Vanguard REIT Index ETF. I believe the rationale for STORE Capital and National Retail Properties holding up substantially better is because they are signing tenants to leases with 10 to 15 year contracts. The revenue certainty (assuming no default) provides a steady stream of cash flow to pay out solid dividends with a very respectable yield. STOR is currently yielding 4.83% and NNN is yielding 4.38%. Those values are based on trailing data, but I expect the forward yields to be slightly higher.
These four companies have a few major things in common:
They have strong dividends backed by earnings (or FFO and AFFO for the REITs).
I believe their revenues are likely to continue growing even if we enter a recession.
They are candidates for "best of breed" classification that cause them to trade at higher multiples.
Those three factors all make them fairly attractive long term holdings. To be fair, big tobacco does not have many comparable competitors for establishing the fair valuation. However, they can reasonably be compared to the rest of the S&P 500.
In this case I would define the best of breed companies as companies that have strong brands and strong management with a track record of success. They have solid margins and use the money from their margins to pay out a solid dividend yield that makes them valuable to income investors even if equity markets are falling.
The only company in that group without a long track record of success is STOR, but the management of STOR has a few decades of exceptional performance leading other companies in very similar business situations. After inspecting their business plan, I expect them to perform well.
I think the move that worked out the best for me was buying Phillip Morris International when I wanted more international exposure. After some analysis of the factors driving the shares it seemed clear to me that Philip Morris would be a viable way to get international exposure with a strong yield and excellent management. At the lower prices seen on indexes today, I'm contemplating adding to my position in SCHF or SCHC. If equity prices recover, I'd go right back to favor Phillip Morris as my international allocation for new cash.
Investing Strategy for 2016
If equity prices recover to something near their previous highs, I would probably look to decrease my position in the broadly diversified funds and focus that cash on buying companies that are going to be more resilient. I'm also looking for good deals in the tripe net lease REIT space. The latest weakness in the economy has been supporting my opinion about buying some of these best of breed triple net lease REITs. I'm also expecting to work a bond allocation or two into my portfolio. By the end of the year I believe the following changes will be in place:
Altria Group will represent more than 4% of my portfolio.
International allocations will represent 10% or more of my portfolio.
Triple net lease REITs will represent a larger portion of the portfolio.
Some direct bond exposure will be in place through either an ETF or a bond mutual fund.
Anyone else care to share how their portfolio has done so far?
Disclosure: I am/we are long DX, FCX, FSRVX, FSTVX, FUSVX, MO, NNN, PM, SCHB, SCHC, SCHD, SCHF, SCHH, STOR, VNQ, VTI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision. Information is regularly obtained from Yahoo Finance, Google Finance, and SEC Database. If Yahoo, Google, or the SEC database contained faulty or old information it could be incorporated into my analysis.