Managing A Conservative Portfolio In Light Of QE3

Includes: CLF, EA, NOK, OAK, RVBD
by: Chris Lau

In September, the European and United States enacted an accommodative monetary policy. In Europe, the European Central Bank ("ECB") announced an open-ended bond purchasing program. The ECB is now free to make unlimited purchases of euro member bonds. The market response was immediate: Span and Italy saw borrowing costs fall.

Following the lead of Europe, the United States Federal Reserve also announced QE3, with this round of quantitative easing open-ended. Income investors are being punished, being forced to chase yield to generate a respectable return from their investments. All investors are now being encouraged to increase exposure to the market now that a market bubble of sorts is virtually assured. The last bubble was about housing. This time, the bubble will be in metals, bonds, and stocks.

Gold, silver, and oil surged after the QE3 announcement, but conservative investors will want to think of a conservative investment strategy that accounts for infinite amount of quantitative easing.

Performance for a $100,000 Model Portfolio

Using a virtual portfolio created on to test and track investing ideas before entering real-life trades, the returns are as follows:

The portfolio returned 36.5%, but under-performed the S&P 500 since inception. In the 1-year period, the portfolio is up 3.81%, but under-performed the index, which rose 20% in the same period.

Portfolio Holdings

The portfolio is heavily weighted in cash at 44%, which will continue to provide ample opportunity to increase the allocation of existing holdings or to start new ones. The high cash balance will also limit the ability of the portfolio to beat the market, unless any of the existing holdings perform exceedingly well.

The top 5 holdings are:

Top 5 Company Holdings














A surge in the share price of Cliff Natural Resources (NYSE:CLF) helped the portfolio keep pace with the index between August and September. Shares of Cliff are up 41.24% from its 52-week low. The company was discussed as being close to a bottom on September 4, and benefited recently from the monetary easing announcements. The company has a healthy dividend yield, but investors will need to monitor China's growth, along with the price and demand for iron ore and steel. Iron ore prices began to tumble in July. China announced approval to spend over $150 billion for infrastructure projects, which helped stop a decline in Cliff Natural Resource shares. Even though shares bottomed, the economy improving in Europe and in China will take at least a quarter to play out.

In the technology sector, the allocation to Riverbed Technology (NASDAQ:RVBD) remained at 11%. Riverbed offers WAN optimization to help customers deliver better performance for their data and cloud solutions. Shares bottomed at $14 in July, and closed recently at $22.82, helped by a general rise in the markets after the QE announcement. Riverbed performed well in September, after the company participated in trade shows that helped widen awareness for its cloud solution offerings. Riverbed participated at VMWare's (VMW) VMworld on August 26-30.

Electronic Arts Inc. (NASDAQ:EA) is another company whose shares found a bottom recently. The position in EA held steady at an 8% allocation even as investors warmed to its competitor. At one point earlier this year, Zynga, Inc. (NASDAQ:ZNGA) was worth more than EA by market capitalization. Investors were previously bearish on EA, because Zynga had successfully poached a number of high-profile executives. Zynga shares are plunging and consumer interest in social media games waning, leading to an exodus in staff. This is enabling EA to gain lost talent from Zynga. EA recently hired former Zynga employees. This will prove to be valuable, as EA increases profitability from its "fermium" model for The Sims Social and SimCity Social. SimCity Social now has 10.7 million monthly active users. By reconnecting with its loyal fan base, EA is positioned to sell the video game version to these users. EA confirmed that SimCity for Windows will be released on February 2013.

In the fixed income space, a new position was started in Oaktree Capital Group (NYSE:OAK). Oaktree is an investment management firm that pays a distribution of over 8%. The company reported second quarter earnings of $0.84 on revenue of $341.1 million, which beat the consensus by $0.22.

A 6% position was started on Nokia Corporation (NYSE:NOK). Shares rose nearly 13% on the week that Apple (NASDAQ:AAPL) announced the details of the iPhone 5. Prior to Apple's announcement, Nokia's Lumia 920 announcement was made, but caused a sell-off in shares. Investors recognized that Nokia's new Lumia is quite good and competitive in terms of specifications, compared to the iPhone 5. Still, Apple will outsell Nokia, because of an established customer base, a thriving applications ecosystem, and pent-up demand. Yet Nokia is not comparable to Apple an investment for the short-term. It will take several quarters for to play out its turnaround. The new Lumia is impressive compared to the iPhone 5, embracing an integrated ecosystem that stretches from Windows 8 for PC to Xbox to Skype and ultimately to a Windows Phone takes time.

Disclosure: I am long RVBD, EA. 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.