How To Positioning Your Portfolio Into Year End

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Includes: ACWX, AMLP, BKLN, DBEF, DFE, DXJ, EMB, EPI, EWX, HYD, IEMG, JHDG, KBWB, PFF, SCHA, SCHC, SCZ, SRLN, VTI, XLE
by: Astoria Portfolio Advisors

Summary

We remain constructive on Emerging Market Equities given the weaker dollar, lower rates, and cheaper valuations.

International Small Caps Have Important Portfolio Diversification Benefits.

We have a Smaller Cap Value / Cyclical bias for our US equity exposures.

How should investors position their portfolios for the rest of 2017?

First, let's address the recent FOMC announcement which always brings a healthy amount of debate.

The Fed told us that inflation was softer while economic growth was stronger. They have more conviction in their near term policy path while they lowered the long run neutral rate.

From a big picture standpoint, the Fed still remains very accommodative and the same goes for other central banks globally. We still have an upswing in the global earnings cycle which supports international equities whose margin of safety is higher compared to US stocks. Lastly, with the Fed lowering the neutral rate income strategies should continue to remain in vogue.

Astoria Portfolio Advisors LLC ("Astoria") believes the following offer an attractive risk reward: International equities, US SmallCaps, and US cyclicals. And for income strategies, we believe that Preferreds, Senior Loans, EM Debt, Munis, and MLPs are attractive.

Let's walk thru a few select ideas.

We remain constructive on Emerging Market Equities given the weaker dollar, lower rates, and cheaper valuations. For our Emerging Market Equities, Astoria is utilizing the iShares Core MSCI Emerging Markets ETF (NYSEARCA:IEMG) which includes Large, Mid, and Small Caps in the Emerging Market complex, as well as the WisdomTree India Earnings ETF (NYSEARCA:EPI). EM Small Cap stocks have a lower beta and lower volatility compared to EM Large Caps (see below) which makes it attractive from a portfolio construction standpoint. This is contrary to the US equity market place where Small Caps historically have had higher betas and higher volatilities compared to Large Caps.

Sources: Bloomberg, Astoria Portfolio Advisors LLC

For our International Equities, we are using the iShares MSCI ACWI ex U.S. ETF (NASDAQ:ACWX), Deutsche X-trackers MSCI EAFE Hedged Equity ETF (NYSEARCA:DBEF), WisdomTree Japan Hedged Equity ETF (NYSEARCA:DXJ), and WisdomTree Japan Hedged Dividend Growth ETF (NYSEARCA:JHDG). How many research reports do you read on International Small Caps? Get our point? In an environment of increased global growth, muted inflation, and with an upswing in the global earnings cycle, International Small Caps are attractive.

Compared to Large Caps, International Small Caps have (1) lower correlations (2) are pure plays on local economies around the world (3) have varying factor and sector exposures (4) have important diversification benefits within a global equity portfolio.

International Small Caps historically have had a value bias (positive bias to book to price) but higher earnings variability (see chart below). For our International Small Caps, we are utilizing the following

  1. WisdomTree Europe SmallCap Dividend ETF (NYSEARCA:DFE)
  2. SPDR S&P Emerging Markets SmallCap ETF (NYSEARCA:EWX)
  3. Schwab International Small-Cap Equity ETF (NYSEARCA:SCHC)
  4. iShares MSCI EAFE Small-Cap ETF (NYSEARCA:SCZ)

Source: MSCI Barra. Based on MSCI Barra’s GEMLT average active factor exposures from December 1998 to June 2017

We have a Smaller Cap Value / Cyclical bias for our US equity exposures. While we are underweight the US given our global macro-economic framework, we own the Vanguard Total Stock Market ETF (NYSEARCA:VTI) for our US large cap exposure. We own the Schwab U.S. Small-Cap ETF (NYSEARCA:SCHA) as the disconnect between Small Caps and the broader market got too stretched this summer. We are also utilizing the PowerShares KBW Bank Portfolio ETF (NASDAQ:KBWB) and Energy Select Sector SPDR Fund (NYSEARCA:XLE) (XLE) given our constructive view on US Cyclicals and Value stocks.

We Value Income Strategies as They Help Reduce our Portfolio Risk. Astoria's Multi Asset Risk Allocation portfolio contains an income sleeve. The total current dividend yield for our model is approximately 3.0%. Can there be any value in Fixed Income after seeing $2 trillion of inflows since 2007? There are bubbles throughout the asset class and its not easy to find value and there are bubbles throughout the asset class but we would note the following:

When factoring in the yield relative to the risk you are taking, Preferreds are attractive. The iShares U.S. Preferred Stock (NYSEARCA:PFF) yields 5.67% and the median 30 day realized volatility over the past 5 years is 4.5%. PFF fits our constructive view on US Large Cap banks which make up 40% of the ETF. PFF yields 5.6% and 33% of the bonds are rated AAA. Duration = 3.6.

The iShares J.P. Morgan USD Emerging Markets Bond (NYSEARCA:EMB), VanEck Vectors High Yield Municipal Index (NYSEARCA:HYD), PowerShares Senior Loan Portfolio (NYSE:BKLN)/ SPDR Blackstone/GSO Senior Loan (NYSEARCA:SRLN), and Alerian MLP (NYSEARCA:AMLP) are other income components of our model.

At the time of writing, Astoria Portfolio Advisors LLC owned positions in IEMG, EPI, ACWX, DBEF, DXJ, JHDG, DFE, EPI, EWX, SCHC, SCZ, VTI, SCHA, KBWB, XLE, PFF, EMB, HYD, BKLN, SRLN, AMLP. For a list of relevant disclosures, please click astoria-advisors. Contact us for complete breakdown of Astoria's Multi-Asset Risk Allocation model portfolio.

Disclosure: I am/we are long IEMG, EPI, ACWX, DBEF, DXJ, JHDG, DFE, EWX, SCHC, SCZ, VTI, SCHA, KBWB, XLE, PFF, EMB, HYD, BKLN, AMLP.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: At the time of writing, Astoria Portfolio Advisors owned positions in IEMG, EPI, ACWX, DBEF, DXJ, JHDG, DFE, EWX, SCHC, SCZ, VTI, SCHA, KBWB, XLE, PFF, EMB, HYD, BKLN, SRLN, AMLP. For a list of relevant disclosures, please visit www.astoriaportadv.com/...