March 2020 IssueLong scroll reading

Snowball’s Indolent Portfolio

By David Snowball

A tradition dating back to the days of FundAlarm was to annually share our portfolios, and reflections on them, with you.

Four rules have governed my portfolio for the past 15 years or so.

  1. I maintain a stock-light asset allocation.

For any goal that’s closer than 10-15 years away, stock investing is speculation. Stocks rise and fall far more dramatically than other investments and, once they’ve fallen, it sometimes feels like they can’t get up. Equity income funds are typically very conservative vehicles, and yet they took four years to regain their October 2007 peaks. International large cap core funds took seven years to reach break-even while domestic large-cap core funds were underwater for five-and-a-half years. The worst-hit categories languished for nine years.

Research conducted by T. Rowe Price and shared here, on several occasions, led me to conclude that I wouldn’t gain much from a portfolio that exceeds 50% stocks. My target allocation is 50% income (half in cash-like investments, half in somewhat riskier ones) and 50% growth (half in firms domiciled in the US and half elsewhere). Based on a review of 70 years of returns (1949-2018), this allocation would typically return a bit over 8% annually, would lose money about one year in six but its average loss would be in the 4-5% range.

  1. I value thoughtful, experienced investors who are risk-aware.

Passive strategies are efficient ways to capture a market’s total returns. That’s true in both rising and falling markets. I’m not particularly comfortable with blindly riding the markets down, so I’m not particularly comfortable with passive (especially cap-weighted or, worse, debt-weighted) investing.

While the returns of a portfolio seem highly variable, even great investors (Mr. Buffett, for example) have long periods of “not beating the market,” risk characteristics of a strategy seem pretty consistent. Funds with lots of day-to-day downside deviation in normal markets have to have dramatic downside in abnormal ones.

The key is finding folks who have managed well in turbulent markets before, who have thought clearly about the role of risk (or volatility) in their portfolios, and who communicate clearly enough that I know what they’re thinking. That gives me the confidence I need to ignore rough patches.

  1. I do not care about “beating” the market or anyone else.

There is no stupider or more destructive obsession in the investing world than this: so how often does your guy beat the market? This is the fantasy football version of investing: we win not by winning but by adding together a bunch of random, unconnected data points and declaring the person with the biggest piles o’ points won.

Earth to Investors: Fantasy Football is Fantasy. It’s not a model for managing your money. In personal finance, you win if and only if the sum of your resources is equal to or greater than the sum of your needs.

If you beat the market 10 years in a row and the sum of your resources is less than the sum of your needs, you lose.

If you trail the market 10 years in a row and the sum of your resources is greater than the sum of your needs, you win.

My guess is that winning requires investments that you understand and can stick with in the long term, ideally calibrated to a calculation of your long term needs. In my case, for example, I win if my retirement portfolio returns 6% per year. If my 6% returns “trail the market,” I still win. If I “beat the market” but make less than 6%, I lose.

  1. I need funds I can afford to buy.

My salary in my first year as a professor was about $14,000. I will retire without ever reaching $100,000. That’s not a complaint, that’s a constraint. For most of my life, I’ve invested in funds with low minimums or those willing to waive their minimums for investors using automatic investment plans.

So, here’s the non-retirement portfolio, ranked in order of their weight in the portfolio.

FPA Crescent (FPACX), a free-range chicken and quite possibly the fund that’s appeared in more of our data-driven articles than any other.

Seafarer Overseas Growth and Income (SFGIX), Andrew Foster’s excellent emerging markets fund.

    1. Rowe Price Spectrum Income (RPSIX), a fund of TRP income-producing funds.

Grandeur Peak Global Micro Cap (GPMCX), the smallest stocks selected by one of the world’s best global small cap stock firms.

Artisan International Value (ARTKX), which I bought at inception 17 years ago. Its management team was split in two in late 2018, so I’m watching a bit more closely.

RiverPark Short Term High Yield (RPHYX), my substitute for a saving account. Ridiculously high Sharpe ratio, often the highest of any fund in existence.

Matthews Asian Growth & Income (MACSX), traditionally one of the two or three most conservative ways to invest in Asian equities.

Brown Advisory Sustainable Growth (BIAWX), my newest fund and the first that’s dedicated to sustainable investing.

Matthews Asia Total Return Bond (MAINX, formerly Strategic Income), about the only fund giving dedicated access to Asian credit markets, which tends to be nicely out of sync with domestic ones.

Grandeur Peak Global Reach (GPROX), the flagship fund for one of the world’s best global small cap stock firms.

Currently, my portfolio is overweight in international stocks, 40% rather than my targeted 25% and underweight in US stocks, at 18%. That’s driven by two forces: (1) managers who have the freedom to invest in the US or elsewhere have, with some frequency, been chosing “elsewhere.” (2) My automatic investing plan isn’t yet active for my only pure US fund.

2019 moves:

  1. cut RiverPark Strategic Income, consolidating that account with RiverPark Short Term High Yield. Strategic Income is a fine fund, but it wasn’t providing enough differentiation with RPHYX. That reflects the fact that David Sherman manages both and that he’s moving Strategic Income to its most defensive stance which increases the overlap with RPHYX.
  2. cut Intrepid Endurance. I love the absolute value orientation and the discipline of holding cash when the stock market is not offering any discounted stocks worth owning. Don’t love the considerable turnover in the management team and the very poor communication about the matter. In part I moved the proceeds to FPA Crescent (FPACX) which espouses the same absolute value discipline (rather more successfully) and in part I …
  3. bought Brown Advisory Sustainable Growth (BIAWX). The managers have an entirely remarkable track record, both in managing risks and in generating top tier returns. As the magnitude of the world’s climate challenge has become clearer, I felt ethically obligated to transition assets into investments that aren’t endangering us all.

2020 moves:

  1. continue monitoring the role of Matthews Asia Growth & Income. It’s a very good fund and I’ve owned it for a very long time. That said, I have more exposure to Asia than to North America.The money might be better used …
  2. continue building my BIAWX position. Since I only added Brown in 2019 and tend to build over time, I probably need to be a bit more vigorous here. That will also help rebalance my foreign:domestic equity split.
  3. continue ignoring financial pornography, screaming heads, click-bait and other appeals to my worst instincts. Between rising market volatility, rising political frenzy and international challenges occasioned by dictators and viruses, that’s going to take some discipline.

And my retirement portfolio?

It’s mostly housed with T Rowe Price and TIAA. Like most of you, my choices very constrained by my employer’s choices. In both cases, there’s a target-date 2025 fund at the account’s core. In my T Rowe Price account, I added funds offering exposure to emerging market value stocks (T Rowe Price Emerging Markets Discovery) and international small caps (T Rowe Price International Discovery). In my TIAA account, I have rather 20% in the TIAA Real Estate Account. It invests, mostly, in commercial real estate and has been returning 6-9% a year with minimal volatility since the mid-90s. Other than for a pounding it took in 2008.

Bottom line

I don’t aspire to getting rich through investing. I would like to be sure that the sum of my resources is greater than the sum of my needs. My definition of winning, above.

I also don’t want to spend my life fretting about my portfolio, or fruitlessly chasing after The Next Hot Thing. My average holding period for a fund is creeping up toward 20 years, which reflects both my strategy (research carefully, choose well, walk away) and my priority (my family, my community, my friends, reading, learning, reflecting …and gardening, now that it’s spring).

I don’t pretend that my needs are your needs, or that my strategy need to be yours. The most we can do is to remind folks that investing is important, that understanding your investments is important, and that discipline is important. Which investments, which discipline … that’s your call.

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About David Snowball

David Snowball, PhD (Massachusetts). Cofounder, lead writer. David is a Professor of Communication Studies at Augustana College, Rock Island, Illinois, a nationally-recognized college of the liberal arts and sciences, founded in 1860. For a quarter century, David competed in academic debate and coached college debate teams to over 1500 individual victories and 50 tournament championships. When he retired from that research-intensive endeavor, his interest turned to researching fund investing and fund communication strategies. He served as the closing moderator of Brill’s Mutual Funds Interactive (a Forbes “Best of the Web” site), was the Senior Fund Analyst at FundAlarm and author of over 120 fund profiles. David lives in Davenport, Iowa, and spends an amazing amount of time ferrying his son, Will, to baseball tryouts, baseball lessons, baseball practices, baseball games … and social gatherings with young ladies who seem unnervingly interested in him.