February 2023 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. My portfolio, indolent in design and execution, makes for fearfully dull reading. That is its primary charm.

2022 was replete with adventures and surprises:

  • Russia invaded Ukraine, which is both the most important and the most tragic story of the year. But also …
  • The Federal Reserve invaded the stock market, following which two events …
  • The stock market crashed, then soared, then crashed, then … something else. The NASDAQ ended down by 33% and the S&P 500 by 19%.
  • The bond market had its worst year since the 1840s
  • The crypto market crashed, sparked by the vast FYX fraud, evaporating $2 trillion
  • Oil soared, ESG soured, and politicians’ lips flapped concerning both.
  • Roe v. Wade was overturned, Mar-a-Lago was searched, Abe was assassinated, the Queen died, Musk rushed about squawking and costing his investors a half trillion dollars, and the “red wave” fizzled.

At year’s end, the wise and the wizards confidently forecast a further double-digit loss in 2023 (GMO, Morgan Stanley, Chanos & co., Ritzholz Wealth Management) or the triumphant return of the bull market in 2023 (Ken Fisher, FundStrat, Motley Fool over and over).

In response to which, I astutely did very nearly nothing with my portfolio. 

I was, I think, awake and richly engaged with a world that was rocked by challenges. My son started graduate school. Chip and I vacationed in the peace of Door County. I rather more than doubled my charitable giving in response to war, disease, and inflation. We voted. We continued trying to make our gardens wilder and a bit more sustainable. I became the director of the college’s honors program, with the charge to renew it. I taught. (I think I taught. Just occasionally, my students make me wonder whether that’s a delusion.)

And personally, I find the bear case substantially more compelling than the alternate. The bear case makes two points. First, the fact that the market is cheaper does not mean that the market is cheap. While the most egregiously overvalued stocks took a substantial beating (the ARK Innovation ETF portfolio, an avatar for such stocks, was repriced by 67% last year but sprinted upward by 28% in January), the rest of the historically expensive market saw a far more modest decline. At the end of the year, the market was still broadly and substantially overvalued by historic standards. The pain of a broad-based adjustment will be widely felt. Second, there is no evidence that the Fed is done with us yet. The Fed vowed “to break the back of inflation.” On February 1, 2023, the stock market rallied when the Fed raised rates only by a quarter point … ignoring the Fed chair’s warning that day that “inflation is still running very hot” and his refusal to even hint at victory in their fight. Nonetheless, pundits began announcing rate cuts by mid-year, a soft landing and good times. They are mostly delusional.

But I didn’t play with my portfolio. By design, my portfolio is meant to be mostly ignored for all periods because, on the whole, I have much better ways to spend my time, energy, and attention. For those who haven’t read my previous discussions, here’s the short version:

Stocks are great for the long term (think: time horizon for 10+ years) but do not provide sufficient reward in the short-term (think: time horizon of 3-5 years) to justify dominating your non-retirement portfolio.

An asset allocation that’s around 50% stocks and 50% income gives you fewer and shallower drawdowns while still returning around 6% a year with some consistency. That’s attractive to me.

“Beating the market” is completely irrelevant to me as an investor and completely toxic as a goal for anyone else. You win if and only if the sum of your resources exceeds the sum of your needs. If you “beat the market” five years running and the sum of your resources is less than the sum of your needs, you’ve lost. If you get beaten by the market five years running and the sum of your resources is greater than the sum of your needs, you’ve won.

“Winning” requires having a sensible plan enacted with good investment options and funded with some discipline. It’s that simple.

My portfolio is built to allow me to win. It is not built to impress anyone. So far, it’s succeeding on both counts. I built it in two steps:

  1. Select an asset allocation that gives me the best chance of achieving my goals. Many investors are their own worst enemies, taking too much risk and investing too little each month. I tried to build a risk-sensitive portfolio which started with the research on how much equity exposure – my most volatile niche – I needed. The answer was that 50% equities historically generated more than 6% annually with a small fraction of the downside that a stock-heavy portfolio endured.
  2. Select appropriate vehicles to execute that plan. My strong preference is for managers who
    • have been tested across a lot of markets
    • articulate distinctive perspectives that might separate them from the herd
    • loath losing (my) money
    • have the freedom to zip when the market zags, and
    • are heavily invested alongside me.

With one exception (Matthews), my managers have more than $500,000 of their own money in their fund and/or own the firm.

My target asset allocation: 50% stocks and 50% income. Within stocks, 50% domestic, 50% international and 50% large cap, 50% small- to mid-cap. Within income, 50% cash-like and 50% more venturesome. I have an automatic monthly investment flowing to five of my nine funds. Not big money, but a steady investment over the course of decades.

So here’s where I ended up:

Domestic equity Nailed it! Traditional bonds Underweight
Target 25% 2022: 25% Target: 25% 2022: 15%
Also managed a 50% large-cap / 50% small-cap weight. Surprising sources: Palm Valley is 25% short-term bonds
International equity Overweight Cash / market neutral / liquid Nailed it!
Target 25% 2022: 40% Target: 25% 2022: 25%
That’s down from where the year began, mostly because several funds fell a lot. My “global” managers are 4:1 international, which accounts for most of the imbalance. Morningstar codes several funds as having double-digit cash holdings: RiverPark, Palm Valley, T Rowe Price Multi-Sector, and FPA Crescent. For Palm Valley and Crescent, I read that as “substantial dry powder awaiting the arrival of bargains.”

The rebalance will be tough but is still called for. It’s tough because several of my managers have the freedom to move between foreign and domestic, equity and bonds, depending on where the most compelling opportunities lay. So reducing my FPA Crescent holding will reduce non-US equity … but also reduces US equity and bonds at the same time.

Here’s the detail for the non-retirement piece:

  M-star Lipper Category Weight 2022 return APR vs. Peer MAXDD %
FPA Crescent 4 star, Gold Flexible Portfolio 22.00% -9.2 4.6 -16.3
Seafarer Overseas Growth and Income 5 star, Silver Emerging Markets 17.00 -11.7 10.3 -20.2
Grandeur Peak Global Micro Cap 5 star, Gold Global Small- / Mid-Cap 15.00 -31.7 -10 -39.3
T Rowe Price Multi-Strategy Total Return 3 star, NR Alternative Multi-Strategy 9.00 -4.7 -1.5 -5.9
Palm Valley Capital 5 star, neutral Small-Cap Growth 8.00 3.2 29.5 -2.8
T Rowe Price Spectrum Income 3 star, Bronze Multi-Sector Income 7.00 -10.6 -0.2 -14.3
RiverPark Short Term High Yield 4 star, negative Short High Yield 6.00 2.7 7.1 -0.2
Cash @ TD Ameritrade     6.00      
Brown Advisory Sustainable Growth 5 star, Silver Multi-Cap Growth 5.00 -31 0.5 -32.8
Matthews Asian Growth & Income 3 star, Bronze Pacific Ex Japan 5.00 -18.4 1.8 -30.8
        -12.1 3.8 -18

So, my portfolio is about two-thirds equity. It dropped 12.1% in 2022, but that’s substantially better – 3.8% or 380 basis points better – than I would have achieved with purely average funds. My managers earned their keep. My portfolio’s maximum drawdown averaged 18%, driven largely by international exposure in my most aggressive funds; still, two of the three funds with the greatest drawdowns ended up the year outperforming their peers.

Palm Valley and RiverPark both earned MFO Great Owl designations for posting top-tier risk-adjusted returns in every trailing period we monitor. Morningstar mostly approves (though that’s not a driver for me, just an FYI for you). They dislike small and odd, which might account for their tendency to sniff at RiverPark Short Term (one-of-a-kind strategy, but it has the highest Sharpe ratio – by a lot – for any fund in existence for the past 6, 8, 10, and 12-year periods) and Palm Valley (small firm).

What will 2023 bring?

A vacation to the Shetland Islands, off the north coast of Scotland? Dramatically redoing the vegetable garden? Revising one of my books, Miscommunication in the Workplace?

Oh, you mean with my portfolio!

Not much. I could imagine shifting part of my Seafarer Overseas Growth & Income investment into Seafarer Overseas Value. The case for EM value seems compelling, and Seafarer is about the best at it. They were the top-performing EM fund in 2022 (down less than 1% on a fully invested portfolio), except for a couple of freakish single-country ETFs.

I would like to find an “impact” bond fund that complements my portfolio. Sustainable investing has two broad branches: (1) avoiding the idiots and (2) rewarding the good guys. On the whole, option 1 is easier to achieve, so it’s more popular. Option 2 calls to me as a concerned citizen: an “impact” bond fund attempts to actively seek out and affordably underwrite socially desirable projects. It might, for example, support community banks or build affordable housing or urban revitalization projects. Such funds earn slightly less than market rates, on average (about 1% over the past 10 years, which, sad to say, pretty much matches the broad bond market return for the same period) but do substantially more for the world. And, to me, that’s a tradeoff I can embrace. TIAA-CREF and Domini have such funds, but I’m not yet sold on them. I’ll keep learning.

There are two funds that I’m really interested in learning about: the closed-end interval fund Bluerock Total Income+ Real Estate Fund and the Freedom 100 Emerging Markets ETF (FRDM), a quasi-index fund that targets emerging markets with the most protection for personal and economic freedom. I approve of the underlying insight.  

Finally, a word about my retirement accounts. I don’t much talk about them because I don’t much have control over them anymore. For entirely sensible reasons, my employer dramatically limited our investment options and increased the incentives to save for retirement. Those moves stopped me from investing in some traditional options (T. Rowe Price and Fidelity) and severely limited my choices at the other (TIAA-CREF).

About half of my money is at TIAA-CREF, with 70% in a target date fund or PIMCO Inflation-Response Multi-Asset Fund, 7% in a fixed annuity, and 23% in the real estate account. The TIAA Real Estate Account operates with negligible correlation to the stock and bond markets, has returned 6.5 – 7.5% annually over the long term, and made 8.2% in 2022. The portfolio as a whole dropped just 10.4% in 2022.

About half of my money is at T. Rowe Price, with 70% in a very good target date fund – Retirement 2025 – with the remainder giving me more international exposure (to EM value and international small caps) or somewhat hedging that exposure (through Multi-Strategy Total Return). The portfolio as a whole dropped about 19% in 2022, driven down by that international exposure.

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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.