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  • Actual Portfolio Management - A Work In Progress

    As an avid reader of Seeking Alpha articles, I don't see a lot of articles about running an actual portfolio. By running an actual portfolio I mean: a) portfolio policies and rules, b) investment allocations and rationale, and c) long-term portfolio performance including discussion. By publishing semiannually, I hope to, at least somewhat, fill that gap.

    The first (and currently the only one) portfolio I will talk about is called "20 Plus Years to Retirement." It should be a given that the portfolio is long-term in nature. The portfolio rules and methodology are below:

    · The minimum timeline before the portfolio is dissolved is 20 years.

    · The portfolio will follow Morningstar sector and super sector groupings.

    · The portfolio will be benchmarked.

    · 15% equal stock allocation to stocks in the defensive, cyclical, and sensitive super sectors (45% of the portfolio total).

    o Allocation to each super sector can be 15%, 7.5% or 5% depending on the number of stocks chosen.

    o The stock choices will be specifically identified.

    o Will maintain at all times except if go to 100% cash or if in the process of changing picks in a super sector.

    o Only equity investments (stocks, preferred stocks, etc.) can be a super sector choice.

    · The remaining 55% of the portfolio will be considered overlay investments.

    o The overlay stocks will not be the same ones as those considered super sector choices with defensive super sector being the exception.

    o ETFs can be used as overlay investments.

    · Can go to 100% cash if necessary.

    · An investment can move from super sector to overlay and vice versa as long as the percentage limits are maintained.

    · Max number of investments is 25.

    · Tax implications will not be considered.

    · Broker limitations will apply.

    This portfolio started on January 1, 2014. The current investments along with dates added to portfolio:

    Date

    Investment Name, (Symbol) and Other

    Rationale

    01/10/14

    American Tower (NYSE:AMT)

    Target Allocation: 7.5%

    Super Sector/Overlay: Cyclical

    AMT is the tower provider Verizon, AT&T and others and has ongoing growth outside the USA. This is a REIT but the primary reason is growth. AMT is part of the Cyclical Super Sector.

    01/10/14

    Market Vectors Wide Moat ETF (NYSEARCA:MOAT)

    Target Allocation: 7.5%

    Super Sector/Overlay: Overlay

    MOAT is a best ideas fund. MOAT is a convenient way to copy a strategy that would result in a lot of trading. If buying for a taxable account, consider replacing MOAT with ELEMENTS Linked to the Morningstar Wide Moat Focus Total Return Index (NYSEARCA:WMW) unless you don't feel comfortable with the credit risk than an ETN brings.

    01/13/14

    Alliance Holdings General Partners (NASDAQ:AHGP)

    Target Allocation: 7.5%

    Super Sector/Overlay: Cyclical

    AHGP completes our holdings in the Cyclical Super Sector. AHGP is the general partner for Alliance Resources Limited Partners (NASDAQ:ARLP). The main product of both is coal which is under attack from the Obama Administration and environmentalists. In spite of the purge to get rid of coal, it will be with us for a long time in electric generation. AHGP has a three year dividend growth rate average of 17.70 percent and has had six years of consecutive dividend increases. AHGP is nice long term compliment to American Tower (AMT). Both supply essential service companies but are not limited to the rates of return they can buy.

    01/17/14

    Spectra Energy (NYSE:SE)

    Target Allocation: 7.5%

    Super Sector/Overlay: Sensitive

    SE is the general partner of Spectra Energy Partners (NYSE:SEP). As the limited partnerships grow, the general partner grows with it but at a faster rate. The current inflation worries have impacted midstream partnership prices but the partnerships are ruled by the Federal Energy Regulatory Commission which allows much higher return than state utilities. SE has wide sustainable competitive advantages and is effectively on sale now. Buy and sleep well at night.

    01/17/14

    Kinder Morgan Inc. (NYSE:KMI)

    Target Allocation: 7.5%

    Super Sector/Overlay: Sensitive

    KMI is the general partner for Kinder Morgan Limited Partnerships and El Paso Limited Partners (KMP and KMR, EPB). As the limited partnerships grow, the general partner grows with it but at a faster rate. The current inflation worries have impacted midstream partnership prices but the partnerships are ruled by the Federal Energy Regulatory Commission which allows much higher return than state utilities. KMI has wide sustainable competitive advantages and is effectively on sale due to short seller attacks. Buy and sleep well at night.

    02/03/14

    Johnson & Johnson (NYSE:JNJ)

    Target Allocation: 5.0%

    Super Sector/Overlay: Defensive

    The stock market swoon is providing an unexpected opportunity to buy quality stocks at a discount. JNJ is a name you've heard of unless you have lived on Mars. JNJ is one stop investment across all parts of the medical sector. JNJ is a relative value play but one to hold for a long time.

    02/03/14

    VCA Antech (NASDAQ:WOOF)

    Target Allocation: 5.0%

    Super Sector/Overlay: Defensive

    The stock market swoon is providing an unexpected opportunity to buy stocks at a discount. VCA Antech (WOOF) is part of the medical sector but the focus is on fido and fluffy. If you have a pet requiring major surgery, chances are you have been at a VCA hospital or used a vet that relied on VCA support. People today treat their pets like kids. WOOF is a major beneficiary of this trend.

    02/03/14

    Southern Company (NYSE:SO)

    Target Allocation: 7.5%

    Super Sector/Overlay: Defensive

    The stock market swoon is providing an unexpected opportunity to buy quality stocks at a discount. Not fully on sale but still a good buy is Southern (SO). SO is the best run electric utility and is partially on sale due to two factors: a) the construction cost overruns at its coal gasification facility and b) the misconception that utilities like SO are poor performers when interest rates rise. In reality, it is company performance and relations with regulators that matter.

    02/26/14

    Guggenheim S&P 500 Equal Weight ETF (NYSEARCA:RSP)

    Target Allocation: 7.5%

    Super Sector/Overlay: Overlay

    RSP is a best ideas ETF that has trounced the S&P 500. RSP was inserted due to limitations on buying the CAPE ETN (NYSEARCA:CAPE). CAPE is a best ideas exchange traded product based on the ideas of Robert Shiller. The Cyclically Adjusted Price-Earnings Ratio (CAPE) measures P-E values over a ten year horizon. The CAPE ratio will not tell you what the stock market is doing next year but rather what securities and sectors are historically cheap. The CAPE ETN is a way to capture this in one bucket. This is a value tilt investment for the long run and is an overlay holding. If your broker does not allow the purchase of CAPE, buy Guggenheim S&P 500 Equal Weight ETF (RSP) instead. Once CAPE becomes available, I plan on replacing RSP with CAPE.

    02/26/14

    PowerShares CEF Income Composite Portfolio (NYSEARCA:PCEF)

    Target Allocation: 5.0%

    Super Sector/Overlay: Overlay

    PCEF is a replacement, due to broker limitations, for the original choice of purchasing the YieldShares High Income ETF (NYSEARCA:YYY). YYY is another best ideas fund that is actually a closed end fund (NYSEMKT:CEF) not an ETF. It is a newer (started in June 2013) than PCEF which debuted in February 2010 and is obviously smaller. YYY tracks the YYY tracks the ISE High Income Index comprised of 30 closed-end funds (CEFs) chosen for their combination of yield, discount to net asset value and liquidity. No holding can exceed 4.25% at the time the portfolio is constituted or when the annual rebalance is done. The index has a 59% weighting in equity CEFs, 26% in debt CEFs and 15% in asset allocation CEFs which include CEFs that don't fit into the equity or bond categories. Like PCEF, this a fund of fund concept that assumes that when professional investors go against individual investors, the professional investors will win. Since most CEFs are held by individual investors, I look at this as reasonable assumption. PCEF has a higher expense ratio, should provide less income than YYY and there is no duration data available (YYY has a duration score of less than two years). If your broker does not allow you to buy YYY, buy PCEF instead. Once the broker allows YYY to be bought, sell PCEF and buy YYY.

    03/11/14

    Seadrill Limited (NYSE:SDRL)

    Target Allocation: 7.5%

    Super Sector/Overlay: Overlay

    SDRL is a deep water driller known for its high dividend yield, high debt, its young rig fleet and its expertise in deep water drilling. Normally a stock with high debt would concern me but after the BP disaster in the Gulf of Mexico, the age of SDRL's fleet is a major plus in that it can command higher rental rates than its competitors because of better safety equipment. The short sighted ness of the market has created an opportunity in that orders for the current year are soft but longer term outlook is solid. Oil prices are stable and the shale oil and gas revolution has not impacted the deep water companies due to US regulations on exports of oil. The company has an order backlog that looks to be stable and is the general partner of a limited partnership. The recent dividend increase may be last one for a while. Company management has indicated that the dividend won't materially increase until the order backlog expands and the market conditions support an increase. I have purchased this security in managing personal accounts for other family members and been very happy. Take advantage of the markets short-term thinking and buy SDRL.

    04/07/14

    Verizon (NYSE:VZ) and AT&T (NYSE:T)

    Target Allocation: 3.75% each

    Super Sector/Overlay: Overlay

    VZ and T need no introduction. They are the biggest and are effectively the duopoly of the controlling mobile communications in the US and large parts of the world. In spite of all the hype about a consumer price war from Sprint and T-Mobile, both are small fry in the US market and even if they combined, it is questionable if they could challenge VZ and T. VZ and T spend more in one quarter on network improvements then they spend in a year. Sprint and T-Mobile are also making a splash to gain customers but killing their margins in the process. Sprint also has a heavy debt load. T's solid foray entry into the prepaid market through its purchase of Leap Wireless will only put further pressure on Sprint and T-Mobile down the road. Buy these in pairs. The unusual percentage sums to same allocation as American Tower giving the portfolio a 15% allocation to the communications industry that has utility like defensive qualities.

    05/16/14

    On Assignment (NYSE:ASGN)

    Target Allocation: 5%

    Super Sector/Overlay: Overlay

    ASGN provides short and long term staffing solutions, including direct hire, to firms in the health care, life sciences, and IT fields. ASGN specializes in the highly skilled personnel with multiple years of experience. The eventual implementation of the Affordable Care Act, aka Obama care, is one factor in limiting the flexibility of employers to right size their firms. With the improvement in the economy, employers cannot continue to stretch their employees much further because of overtime costs and employee burnout. They will either have to hire or add temporary staff. ASGN will benefit from both of these trends.

    05/16/14

    Enbridge Energy Management LLC (NYSE:EEQ)

    Target Allocation: 10%

    Super Sector/Overlay: Overlay

    EEQ is one of two MLP institutional shares on the market (KMR is the other). EEQ is purely a turnaround situation capitalizing on the fact that cash flow coverage of distributions to partners will improve as more projects come on line with eventual distribution increases as well. The parent of EEQ, Enbridge, is a well-known name that can also drop more projects down to EEQ. However, the primary driver will be the improving distribution coverage.

    The portfolio rules require the use of a benchmark. The best benchmark would be the Vanguard Total Stock Market ETF (NYSEARCA:VTI). Since Morningstar is used to track the portfolio and VTI is not one of the options Morningstar offers to as a comparison, the benchmark will be the Morningstar US Market Index (MUSMI). MUSMI is very similar to VTI so it makes for a good substitute.

    The portfolio performance has been pretty good. Year to date (through 06/30/14) the portfolio has returned 12.02% versus 6.84% for the benchmark.

    Investment

    Out(Under) Performance

    Spectra Energy (SE)

    16.95%

    Johnson & Johnson (JNJ)

    15.93%

    Enbridge Energy Management LLC (EEQ)

    14.16%

    Alliance Holdings GP LP (AHGP)

    13.91%

    Seadrill Ltd (SDRL)

    8.68%

    VCA Antech (WOOF)

    7.53%

    Southern Co (SO)

    4.87%

    American Tower Corp (AMT)

    3.38%

    Market Vectors Wide Moat ETF (MOAT)

    1.03%

    Guggenheim S&P 500 Equal Weight (RSP)

    0.43%

    PowerShares CEF Income Composite (PCEF)

    0.02%

    Kinder Morgan, Inc (KMI)

    -1.82%

    On Assignment (ASGN)

    -2.23%

    Verizon (VZ)

    -2.86%

    AT&T (T)

    -5.49%

    As good as the six months has been, it does not make a trend. The next review point will be January 1, 2015. If the outperformance continues over three to five years, then there is enough of a track record to state that I have some skill in stock picking and portfolio allocation. Until that time, my outperformance may be attributable to pure luck.

    Disclosure: The author is long SDRL, AMT, VZ, T, ASGN, MOAT, AHGP, SO, SE, RSP, PCEF, KMI, EEQ, JNJ, WOOF.

    Additional disclosure: This is an actual cash portfolio.

    Jul 10 2:01 PM | Link | Comment!
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