The “Gambler”

 

You’ve got to know when to hold’em

Know when to fold’em

Know when to walk away

Know when to run…

The Gambler (released 1978), lyrics by Don Schlitz, vocals by Kenny Rogers

 

Growing up in rural western Kentucky, it shouldn’t come as a surprise that country music stations littered the AM/FM radio dials.  The Gambler received significant air time not only on country stations but also pop stations as the country sound began a “crossover” from its honky-tonk roots to arguably, the more mainstream pop or Top 40 genre.  While our method of following disciplined allocation strategies doesn’t correspond with the chorus, the lyrics do seem to reference the subtleties of reading a situation and taking steps (in a portfolio) that might work to one’s advantage.

 

The Winning Streak

To date, 2017 has been a positive year for equity and bond markets alike.  It is always gratifying to see client portfolios increase in measured increments without the anxiety that often accompanies a sharp peak or a deep, extended valley.  What may be less obvious is the un-harried time a steady, appreciating market gives investment managers to deliberate economic conditions and to decide what, if any portfolio changes might need to be made.

Over the past several months, our investment team has discussed two primary questions.  First, are U.S. and international economic indicators signaling a slowdown or end to the current 8 year bull market?  Second, without retreating from stated fixed income, hybrid and equity (U.S. & International) allocation targets, are there areas of weakness should equity markets experience a sharp or extended decline?  There is no way to predict the latter scenario with any accuracy, but The Gambler and history would suggest that businesses and markets experience up and down cycles.  Given the market’s extended positive run, it seems reasonable to assume a reversal is somewhere in the cards.

 

What’s in the Cards?

Since we subscribe to the theory that no one knows which way the market will turn at any given moment, we don’t speculate on what the future market and economic cards may hold.  This is the basis of a fully allocated portfolio strategy that includes numerous holdings in 5 key asset classes, one of which is cash.  However, electing not to speculate does not preclude the occasional adjustment.  As the earlier questions about economic indicators and weaknesses were deliberated, it became clear that some minor portfolio adjustments might be prudent in the context of the extended bull market.

 

De-Risking the Deck  

Some of you may have noticed the addition of a new hybrid investment earlier this year.  CS (Credit Suisse) Managed Futures Strategy was added to portfolios as a buffer against a declining market.  The funds’ historical performance suggests the possibility of modest increases during declining markets due to its underlying investment strategy.  The 2% CS Managed Futures investment came from a reduction of US mid-cap (1%) and developed international (1%).

More recently, Schwab’s US Large Cap Growth ETF, ticker SCHG, was sold in all but a few accounts where capital gains made it prohibitive.  SCHG has done very well during 2017.  It is a reasonably diversified holding.  However, it currently has an almost 20% concentration in Apple, Google, Facebook and Amazon.  All are fine companies with impressive business models but we were uncomfortable with a 20% concentration.  SCHG was switched to PowerShares Dynamic Large Cap Growth ETF, ticker PWB.  In our opinion, PowerShares follows a preferable “weighting” discipline with the companies the ETF holds.  It (PWB) also rebalances quarterly back to the stated targets of its underlying holdings.

Between now and January 2018, more de-risking within broader allocation targets will likely occur.  Said differently, these steps should not be interpreted as exiting the equity markets.  They are subtle moves within certain asset classes in an effort to mitigate volatility and increase downside protection relative to broad market index declines.

 

The “Chorus” Reality

You’ve got to know when to hold’em
Know when to fold’em
Know when to walk away
Know when to run…

 

The chorus provides four options with no clear indication of which, if any, to choose.  As a firm that follows a disciplined rebalancing asset allocation strategy, in some ways, all are in play over time for certain investments. This strategy also makes it unlikely that we will walk away or run from the markets. Thoughtful oversight and reasoned decisions will be the clear favorites when navigating volatile markets and making any adjustments to a long term, investment strategy.