Kepler Portfolio Review: June 24, 2013

by: Lowell Herr

Platinum members tracking the Kepler Portfolio will want to take special note of the coming changes in the allocation of assets in this portfolio. While the Kepler was not one of the original five ITA Risk Reduction (ITARR) portfolios, I am going to activate the Momentum-Optimization Model with this portfolio due to the early success with other portfolios following the MOM model.

Efficient Frontier: Recent moves in the portfolio already moved the current portfolio up the efficient frontier scale to where the Kepler is now a more risky portfolio than recommended by the optimizer. I don’t have major concerns as the risk will be controlled to some degree by the MOM plan. Under performing asset classes will be sold or the portfolio will be shorted using the ultra-short ETF, SDS as a hedge against downward pressures.

Kepler Dashboard: While I intended to maintain the Dashboard for this portfolio, it will take a secondary role as the MOM plan will at times make a mess of this asset allocation model. For example, right now readers can see the emphasis is on large-cap U.S. Equities while bonds, emerging markets, and commodities are under played.

Kepler Performance: The Kepler continues to outperform the ITA Index and the gap widened by 40 basis points over the last few weeks. That is the good news. As the U.S. Equities market continued (until very recently) to power forward the VTSMX left the portfolio in the dust. The Internal Rate of Return [IRR] for the Kepler faded by 40 basis points when compared against the IRR for VTSMX. The $21,000 dollar difference is not trivial.

The 25% allocated to developed and emerging international markets did not serve this portfolio all that well over the past year.

Ranking: The following ranking of ETFs will be helpful to readers as they seek to manage their own portfolios. The Berkshire stock tops the list followed by several sector ETFs and one value ETF, VTV. The total stock market ETF, VTI, is right up there among the leaders.

I recently read that the stock market generally has a volatility of +/- 20% in any given year. If you look down the Volatility column you will see that is about where many of these ETFs land. Bonds are much lower, as one expects.

Buy-Hold-Sell Recommendations: And now we come to the “decision making” data table. I intend to sell GTU as one of the first moves. PCY is another sell candidate and I plan to reduce shares held in RWX and VNQ, two REIT holdings. I’m not in a big hurry to buy anything, but if I were the likely candidates are VTV, VFH and VCR.

BRK.B is one of those securities showing a mixed signal. Based on momentum, one holds it in the portfolio despite the optimization recommendation. In my case I plan to hold on to the shares until the momentum swings to the negative side.