Building on an asset allocation plan advocated by David Swensen in his book, Unconventional Success, three dividend-oriented stocks are added to improve projected return and increase the Return/Risk ratio. Using the original Strategic Asset Allocation [SAA] plan laid out in the "Swensen Six" core of ETFs, the 30% allocation to equities is not changed.
A screen was created to sift through over 9,000 stocks to find companies with the following characteristics. 1) Dividends increased each year for the past seven years. 2) Free-Cash flow was positive over the past 12 months. 3) P/E ratio was less than the industry average. 4) Price/Book ratio was below the industry average.
Listed below are the only three individual stocks that passes this tight screen.
Alterra Capital Holdings Limited (ALTE) is an insurance holding company providing diversified specialty insurance and reinsurance products to corporations, public entities and property and casualty insurers.
National HealthCare Corporation (NHC) operates long-term health care centers with associated assisted living and independent living centers.
Telephone and Data Systems, Inc. (TDS) a diversified telecommunications service company, provides wireless and wireline telecommunications services in the United States.
Under current market conditions, these five goals were established for this portfolio: 1) The projected return should exceed that projected for the S&P 500 by one percentage point. 2) The projected standard deviation will be less than 15%. 3) The Diversification Metric [DM] will be 40% or higher. 4) The Portfolio Autocorrelation, the least important metric, will come in under 25%, and the lower the better. 5) The Return/Risk ratio should exceed 0.60.
Examining the screen shot below, all the goals are met. The projected return exceeds that for the S&P 500 by 1.5% and the projected uncertainty at 14.2% is below the goal of 15%. These two numbers give rise to a Return/Risk ratio of 0.60. DM, at 40%, just meets that goal, and the PA is a low 10.9%.
The allocation to U.S. Equities remains the same as in the original "Swensen Six." Seventy percent (70%) of the portfolio is oriented toward equities, and includes both domestic and international companies. Fifteen percent (15%) was removed from VTI (VTI), and five percent (5%) was allocated to each of the three stocks, Alterra Capital Holdings, National Healthcare Corporation and Telephone and Data Systems. The 20% allocated to Vanguard REIT Index ETF (VNQ) and 15% to TIP (TIP) provide significant inflation protection. High quality U.S. government obligations--TLT (TLT) and TIP-- make up 30% of this portfolio. There is a 20% exposure to international markets, helping to create a well-diversified portfolio.
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The following table is the correlation matrix for the "Swensen Plus" portfolio. While the core ETFs, VTI, VEU (VEU), VWO (VWO), and VNQ, are highly correlated, the three individual stocks are instrumental in raising the Diversification Metric, as well as increasing projected portfolio return over the basic six ETFs.
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While not all stocks have low correlation with broad market ETFs, such as VTI, with some care, it is possible to find companies that are instrumental in pulling down portfolio risk while enhancing potential return. That was the goal in an effort to establish the "Swensen Plus" portfolio.