Reading the headlines and thinking about life ahead, I have a hard time believing that most of us don't harbor some fear, uncertainty, and doubt. Our own FUD Factor arises from three external concerns - geopolitical strife, rising interest rates, and a slowing economy - that could affect our ability to meet our financial aspirations to enjoy retirement while helping educate the next generation with something left over. Different people have different FUD Factors which is why one approach to investing does not work for all. Before investors address their situation, they must come to terms with their own FUD Factor.
To this end, we have carefully considered six investment criteria: 1) To be in stocks given the potential for rising rates and the unwinding of QE to really erode fixed income prices, 2) In transnational companies with the ability to withstand geopolitical crosswinds, 3) That 'supply' to core human 'demand' that is relatively stable, 4) With the promise of growth from major socioeconomic trends such that we can build a financial corpus for the next generation, 5) Generating dividends in order that we are able to attend to our cash needs, and 6) Having good prospects for strengthening fundamentals while trading at reasonable prices.
These six investment criteria led us to construct nine portfolios plus one in climate change that overlaps with the others: 1) Air & Defense, 2) IT Services, 3) Fuel/Natgas, 4) Electricity, 5) Crop-based Food, 6) Fresh Water, 7) Disease Prevention, 8) P&C Insurance/Re, and 9) Engineering. As this table demonstrates, our assets all satisfy our first two criteria above insofar as they are in stocks in transnational companies:
|1. Air & Defense|
|2. IT Services|
|5. Crop-based Food|
|6. Fresh Water|
|7. Disease Prevention|
|8. P&C Insurance/Re|
|9. Engineering, etc.|
|10. (Climate Change)|| |
(In fact, we also have an eleventh 'portfolio' that is really a hodgepodge, an olio. It is outside the scope of this article because it was never intended to meet most of our investment criteria above. It contains five partial-positions in small-caps on the bleeding edge of discovery in various areas. The size of this whole book about equals that of each individual position in the portfolios above.)
Our third and fourth investment criteria target companies that 'supply' to core human 'demand' with the promise of growth catalyzed by major socioeconomic forces. In spades, the portfolios and companies above satisfy these objectives:
- Air & Defense. Geopolitical tensions contributed by terrorism, tyranny, and trade continue to mount in the Middle East, Korean Peninsula, and South China Sea. At the same time, some countries appear to have become both offensive and defensive while calling on allies to do more.
- IT Services. New technologies - cloud, cyber-security, artificial intelligence, and blockchain - require integration with core data processing that is increasingly outsourced to major providers because many corporations and governments are finding that they really can't maintain the internal understanding or expertise to manage it.
- Fuel/Natgas. The future of fuel will belong to traditional hydrocarbon suppliers that make the transition to renewable/clean energy. This is one of the most important socioeconomic transformations on the horizon; the odds favor the major integrated oil companies and dominant niche providers.
- Electricity. Clean energy cannot happen without electricity. As opposed to focusing on very competitive appliance markets (EV's, for example) we believe there is more promise in 'upstream' assets including grid infrastructure and integral technologies.
- Crop-based Food. Whether we have bottomed in the current ag-commodities price cycle, there is no doubt that the need for efficient nutrition will continue to grow with population trends, changing eating habits, and climatic volatility requiring better seeds, chemicals, and management.
- Fresh Water. In many US locales, the DNR monitors the aquifer/water table in real time with piezometers, powered by solar panels, uploading data to satellites; this is how sensitive we have become to demand/supply imbalances for fresh water. Recycling waste water, desalinization of sea water, and improved conservation are central to addressing this challenge.
- Disease Prevention. I have chosen the word "prevention" carefully reflecting our belief that, as resources for healthcare become scarcer, governments and insurers will focus more on heading off diseases or nipping them in the bud leaving longer-term treatment and cost decisions to those afflicted.
- P&C Insurance/Re. This sector is central to risk management and offers upside potential should interest rates rise within a business model designed to protect the spread, and maximize the use of cash, between the time that premiums are collected and claims paid.
- Engineering, etc. Many of the initiatives embodied above and below require world-class engineering and project management expertise. Moreover, when the US gets around to passing a new budget, it is likely to contain substantial infrastructure investments mandating the involvement of the leaders in this space.
- Climate Change. And, finally, climate change is our 'overlay' portfolio that covers many (not all) of the sectors above. There are massive amounts of time-series science that the phenomenon, contributed by humans, is upon us with escalating negative effects. We've accepted (others haven't) that climate change will present significant strategic investment opportunities.
Before jumping into a few numbers, I want to pause to briefly discuss sectors in which we don't invest, at least now. They include clothing companies, gadget and toy manufacturers, entertainment concerns, retailers, and restaurants. We believe that these sectors, unlike those above, are more vulnerable to fads and obsolescence, elastic/price-sensitive demand, distribution channel competition, and economic downturn.
Nor, as suggested earlier, do we invest at this point in bonds, bond proxies, or REIT's given their higher sensitivity to rising interest rates as potentially exacerbated by the withdrawal of QE. However, as we see monetary policy tightening/accelerating, we contemplate 'riding the yield curve up' by shifting assets to money-markets and short-term treasuries.
We have built these portfolios methodically over the last few years with a view to the future. Given the timing differences with which we have realized gains/losses and reallocated assets, tracking performance is fussy. To keep things simple, here we see our unrealized gains on these nine books expressed as percentages. More meaningfully, and responsive to our fifth criterion above, this table also shows the average dividends of the respective stocks (as of yesterday) compared to the S&P 500.
|Portfolio||Percentage Gain/Loss||Average Dividend|| |
B/W than S&P 500
|Air & Defense||+33%||2.39%||+0.39%|
There are stellar performers and a few turkeys among these positions. We've been particularly disappointed in IBM and General Electric, and the engineering sector that we recently laid in has yet to take hold. However, for the time being, we are committed to these laggards because we believe they are well-positioned for the years ahead. Also, the purpose of this and my other SA articles is not to blow sunshine.
Most of the stocks in these portfolios are fully valued and I would not suggest establishing positions in them now. However, if your FUD Factor closely aligns with ours, these and other investments may deserve a place on your watch list. That aside, there are a few ideas above that may offer near-to-medium term potential based on the foregoing and for developing fundamental and/or technical reasons, our sixth criterion:
- ENGIE, a French powerhouse, that appears to be making progress on a transformation that could position it as a leader in the clean energy and other areas influenced by climate change.
- General Electric that has been through 10-years of a gut-wrenching transformation but is uniquely positioned to take advantage of trends in fuel and electricity and is trading at an attractive forward P/E.
- IBM with broad and deep client relationships, an industrial-strength platform extendable to AI, unequaled expertise in cyber-security and probably blockchain, and an appealing valuation.
- Lockheed Martin with its "Thaad" anti-missile missile that is gaining notice as the defense technology of choice to thwart advanced aggressors.
- Total, an integrated fuel company, headquartered in France, that is out front in natural gas as a 'transition fuel', has a majority interest in SunPower (SPWR), and is well priced assuming oil prices do not back up.
We read a lot of articles these days about this pick or that, from the vantage point of a single sector or as a dividend contender, what have you. Especially now - given that the bull market is long in the tooth and monetary juice may be withdrawn - it may be time to step back and reflect on your financial aspirations and external concerns.
Your FUD Factor is your own. There are folks on this site who are quite focused on REIT dividends such that they don't seem to care much about value investing; Tanger (SKT) shareholders come to mind. There are others who are hyper growth-confident and risk-tolerant such that they appear willing to bet big on companies like Tesla (TSLA). The only 'wrong answers' are the ones lacking context or that result in major mistakes.
My wife and I discuss external concerns and our financial aspirations regularly as we position our portfolios. Does this make us bulletproof? Absolutely not. The process is our confidence that we are anticipating and preparing. And, oh, by the way, we're always open to new ideas that address our FUD Factor.
Disclosure: I am/we are long BA, BAESY, LMT, NOC, RTN, ACN, IBM, BP, ORA, RDS.B, TOT, ABB, GE, SIEGY, ADM, BG, DD, INGR, MON, SZEVY, VEOEY, GSK, JNJ, MRK, PFE, SNY, CB, MURGY, SSREY, TRV, ZURVY, ENGIY, FLR, JEC.
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.
Additional disclosure: Always do your own due diligence in consultation with a competent financial adviser who puts your interests ahead of their own. Remember, there are added considerations in owning foreign securities including those associated with buying and selling the pinks, foreign withholding taxes on dividends, and ADR fees. (All my proceeds from contributing to SA go to charity.)
Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.