Report On 'New Normal' Portfolio

by: Lowell Herr

The following report on the "New Normal" portfolio comes from Bob Warasila, the creator of this set of assets.

The New Normal test portfolio is now at the 2 year mark and is ahead of the benchmark VTSMX. This portfolio is based on some comments by Pimco’s co-chairs and Geoff Considine (What the New Normal Means for Asset Allocation, August 8, 2009) of QPP back in the summer of 2009 when we were not that far away from the March 2009 bottom. The premise was we would see slow growth and high inflation for an extended time. So far I only see the former has fulfilled the prediction. Considine’s advise was:

1.) Select individual stocks from Dividend Arisocrats as the choice of equity exposure.

2.) TIPs should be used for bond exposure to protect against inflation.

3.) High Beta stocks and/or ETFs are too risky.

4.) An emphasis on international equity exposure is necessary to protect against a weaker $.

5.) To these I added an exposure to precious metals, especially gold.

Considine presents some specific assets in the article so I drew from those for my own preferences. My allocations were:

  • 29% large value
  • 5% Large core
  • 5% Large growth

The emphasis on large cap is consistent with PIMCO’s and Considine’s NEW Normal strategies.

  • 4% mid-cap

This is largely dictated by the choice of stocks.

  • 9% Real Estate
  • 5% commodities
  • 8% gold (silver?)
  • 10% International
  • 5% Emerging markets
  • 20% bonds

There are 23 assets total of which 9 are individual stocks selected from the SP Dividend Aristocrats, Lowell’s Crème List and 2 gold stocks [Barrick (NYSE:ABX) and Newmont (NYSE:NEM)] of my choice. For the large caps I chose DVY and VPU plus several stocks. Each individual stock tends to by 2%. The gold exposure is GLD, ABX and NEM with 6% in GLD and 1% each in ABX and NEM. I held SLV for a period but sold that to rebalance my precious metals exposure. RE is VNQ and emerging markets VWO. Because of the emphasis on dividends I chose EFV and IDV for the international exposure. Commodities are GSG although in my IRA I hold a more mixed exposure where equal amounts of GSG, JJA, DJP-OLD and GCC are used. If the portfolio had more $ I would use the more balanced allocation. Also there is a 2% XOM asset which I classify as Large Core but I think one could argue it is a commodity. However GSG is based on commodities futures so I prefer to keep it separate.

Over the last two year I have sold two of the large caps and replaced them with alternatives. I did this in one case after a large gain [M&T Bank (NYSE:MTB)] and the other after a disappointing gain [Wal-Mart (NYSE:WMT)]. The average dividend yield of the individual stocks is about 4%. Recently I added Annaly (NYSE:NLY), which is a favorite of Lowell’s and sports a 14% yield. That should pick up the yield to 6% if it is sustained.

The bond exposure is split between IEF (intermediate), HYG (high yield), TIP and PFBDX (a PIMCO international bond fund). The total bond exposure has an 11% IRR.

Now how has this portfolio performed? Well against the benchmark it has trailed by 10% and led by 6%. The high trailing marks were registered early in the history before dividends began to accumulate and hopefully we will not see those kinds of numbers again. Whenever the SP and Dow are falling this portfolio tends to go ahead (it doesn’t fall as much) so it is a decent protective allocation.

TLH Spreadsheet numbers: New Normal Portfolio IRR 12.7%, VTSMX IRR 10.2% as of 9/16/2011.

QPP numbers: Return 7.63%, Uncertainty 13.5%, Risk ratio 0.57, DM 46%, PA 17.8%, Portfolio Beta 74.5%.

This portfolio is in a Roth IRA and has received contributions within the 2 year life time.