Constructing a Portfolio from the Top Down

Includes: FXI, GCC, GXC, PHO, UCI
by: Roger Nusbaum

Maybe I am the last to know about this fund, but I read about the DWS Scudder Global Thematic Fund in the Wall Street Journal the other day. It has a bunch of different ticker symbols but you should be able to find info with SCOBX.

The idea behind the construction of the fund is to build a diversified portfolio in such a way as to allocate by theme instead of sector.

  • Talent & Ingenuity (companies that thrive on intellectual property and talent) 18.52%
  • Global Agribusiness (you know what this one is) 16.12%
  • Disequalibria (industries where circumstances force change and innovation) 15.97%
  • Supply Chain Dominance (companies that can squeeze suppliers) 9.46%
  • Large Units (companies that benefit from global growth in consumerism) 8.36%
  • New Annuities (companies whose businesses create an annuity-like stream) 7.32%
  • Private/Public Partnerships (by way of example, Deutsche Post and an airport) 4.81%
  • Security (more than just defense contractors) 4.56%
  • Asymmetric Negotiators (companies that can conduct one-sided negotiations) 3.42%
  • Market Hedge (they use mining stocks here) 3.05%
  • Ex-Atrophy (companies leading Japan out of its long-time stagnation) 2.89%
  • Distressed Companies (you know this one too) 2.84%

In reading the list of themes I wouldn't have known what even half of them meant. This article from Morningstar gives a little more color on some of the themes. According to the WSJ piece, the fund is out of global agribusiness as the managers perceive a supply glut coming.

I should add that the fund gets five stars from Morningstar. Over the last seven years it beat MSCI EAFE Index (not sure if that is the fund's benchmark but that is the index M-star uses to compare) three times, lagged it four times and YTD is ahead. I'm not sure what makes it a five star fund, not a shot, I really don't know.

I'm not really interested in the fund or the themes they chose, but the idea of constructing a portfolio from the top down via themes important to you is an interesting concept. For discussion's sake what themes would be important to you and how could you access those themes?

Here are some that I think are important and, more importantly, will continue to be important for a while to come;

  • Water (can be accessed with ETFs or stocks but the precision of certain stocks might be better)
  • Infrastructure (current ETFs are fairly blunt but have some purpose, stocks again can be more precise; engineers, toll roads and so on)
  • China (to use ETFs is to be comfortable with heavy financial exposure with two of them or some solar with the other)
  • Frontier Ascendancy (here ETFs, when they come, should capture this theme very well)
  • Inflation (commodities, which can cover a lot of ground with different sorts of products, and TIPS would seem like a simple way to go
  • Increasing Resource Demand (obviously overlaps with inflation above)
  • Surplus Countries (the idea here being countries at the opposite end of various spectrums from the US)

These are just examples; you may have other ideas.

I think a diversified portfolio could be constructed around these themes (or any of your own) to take in different sectors, cap-sizes, countries, volatilities and the like, but it would take a lot of work. Despite the thesis put forth by SCOBX's manager that this sort of construction can deliver diversification, it would seem very easy to end up with lopsided bets.

The theory behind the fund is unlikely to cause anyone to redo the way they do things, but it stretches the thought process a bit which is always constructive.

I've been writing about investing in themes for as long as I've been writing so I am a believer but I add it in differently. As a function of what I read and otherwise observe, certain themes resonate and then I try to figure out how to work them into the portfolio.

As an example, when I had exposure to China before, I felt that the best way in was with the oil companies. China's usage is obviously increasing and this helped all the Chinese oils. The next time I go back into China it will be another way, as I no longer think the oils are the best way in.

So when I had Sinopec (NYSE:SNP), it was part of the allocation to energy. If I were to go back in with a bank (this is an example only, I'm not sure how I will go back in but it won't be with a bank) then it would obviously be part of the allocation to financials.

That explanation is probably obvious, but in case it isn't...

After the action on Thursday and Friday we may all need one of these little tiny cars.