We update our portfolio strategies
Letter from the President
We’re updating our model portfolio strategies.
We’re changing the investment horizon for La Carpeta Negra Short Term (LCN-ST) to 12–24 months from 6–24 months. This is our way of recommending that clients keep one year of liquidity requirements in U.S. dollar cash. We define “cash” as anything FDIC protected (checking and savings accounts, money market accounts, and CDs) and U.S. Treasury securities maturing in the next 12 months.
In LCN-ST, we’re selling short-term municipal bonds, increasing our cash position from 30% to 50% of the portfolio, increasing our relative allocation to U.S. (small cap) equity to 15% from 10%, and doing the same for our allocation to 7–10-year Treasury securities. We’re leaving unchanged our small positions in emerging market U.S.-dollar–denominated sovereign bonds and ex-U.S. investment grade bonds.
We’re making these moves to stabilize the portfolio, which has been losing money. One way to stabilize it is to put half of it in dollar cash. Then bet on equity (our favorite U.S. dollar asset class for a horizon 12 months out) and hedge our bet with Treasuries. Add yield from emerging market bonds (where we anticipate tame inflation and thus few monetary policy rate hikes in emerging economies moving forward) and hedge our pro-dollar stance with non-U.S. investment grade bonds.
Our model portfolio La Carpeta Negra Medium Term (LCN-MT) is designed for 2–5-year investment horizon. It’s time to start gradually reducing U.S. dollar exposure. At the same time, we think that rising interest rates in the USA can hurt real estate fund (REIT) valuations. So, in LCN-MT, we’re splitting our 10% allocation to real estate in half, keeping one half in U.S. real estate and moving the other to non-U.S. real estate.
In Mexico, our favorite non-U.S. real estate trust ETF is not very liquid. But various Mexican real estate trusts are. One way to implement this if your brokerage house is in Mexico is to buy Mexican real estate trusts. I would wait if I were you, however, till after the Fed has begun hiking rates and the peso starts to show sustained upward momentum against the dollar. I expect the first rate hike in quarter 3 and the peso to build positive momentum in quarter 4.
For clients who are long-term (5+-year) investors, we offer strategies similar to the one modeled in La Carpeta Negra Long Term (LCN-LT). In this portfolio, too, we’re moving slightly away from the U.S. dollar, by doubling our small (5%) exposure to real estate by taking a new position in non-U.S. real estate. To do this, we’re slightly shrinking our large core allocation to U.S. mid-cap value stocks.
Note that the added exposure to non-U.S. real estate does more for our portfolios than just begin decreasing our dollar exposure. It also translates our view on global interest rates into a money-making proposition: if we’re right that in Japan and in mature European markets quantitative easing will be prolonged still and even increase, while in the USA rates will now gradually rise, then real estate trust valuations should improve outside the USA relative to inside.
Portfolio gains from these moves probably won’t show up in our portfolio performance for about two years. Remember, we measure our performance in U.S. dollars and expect the yen, euro, and other developed European currencies to weaken against the U.S. dollar in the next two years. This weakening may outweigh any real estate outperformance outside the USA relative inside to the USA.
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 When we say that we “hold”, “are exposed to”, or “trade in” a particular asset class we mean that we simulate in a model portfolio positions in, exposure to, and trades of, exchange traded funds (ETFs) that replicate indices representative of said asset class. For example, the sentence “We bought local-currency emerging market sovereign bonds” means that we simulated the purchase of an ETF that passively replicates a local-currency emerging market sovereign bonds index. Through our model portfolios, we show one way to translate our global macro and market views into portfolio strategies and broadly summarize the myriad individualized strategies we’re concurrently applying to client portfolios. Details on our model portfolios are available to clients. For more information, please write to email@example.com.
- 23 June 2015: “We update our portfolio strategies”; “relative inside to the USA”;” increasing our cash position from 30% to 50%
doubling our cash position from 30% to 60%“; ” half of it most of itin dollars”