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Doing Nothing Since February 2008
As indicated in my February 2009 Active Indexer column at http://www.indexuniverse.com/, the best course would have been to have stayed with our February 2008 allocations while timely covering our shorts during the fourth quarter of 2008. No changes since then would have resulted in 7.8% and 7.3% positive returns over the past 12 months, and for year 2008 versus the AI 75-50 Portfolio's -10.5% and -2-2% results for these periods.
A static allocation bested our active allocations by 18.3% and 9.5%. How? Instead of selling Consumer Staples stocks (FDFAX), 1-3 year Treasury Notes (SHY) and Health Care stocks, and buying Energy Income & Growth Fund (FEN) and Macquarie Infrastructure (MIC) in June 2008, we should have stayed with an original Beta, Non-Beta Mix. Over the past 12 months, our best-performing long positions were the yen (FXY), gold (GLD), Consumer Staples (FDFAX), 1-3 year Treasuries, and Health Care stocks (VHT). The best shorts were the carry trade (DBV), emerging market stocks (EEM), the S&P 500 Equal Weight (RSP), Basic Materials (SMN) and Consumer Discretionary stocks (XLY).
We began to cover shorts in September 2008, covering all by November 21, but we were too early to sell defense and buy offense. Our sins contributed to our worst month-end drawdown, of -17.5%, from February 2008 through October 2008.
AI 75-50 recovered nicely from November 21 through January 2009, with a 14.6% gain. We beat our benchmarks handily. Trading in the most volatile 90-day period on record (September through November) was very stressful. Very few investors were prepared for the massive liquidation and the pounding that stocks and credit took during the Panic of 2008.
The Do Nothing Results is proof that our Beta - NonBeta asset allocation process is sound. It entails recognizing Betas on the Cusp (low beta assets behaving like beta assets). We covered this process in more detail in: Defend to Advance: Minsky Moments.
Portfolio Exposures & Convictions
Figure 11 is a focused list of indexes and asset classes (we keep an eye on many more) and corresponding exchange-traded funds (ETFs). Returns are through March 1, 2009. AI 75-50 portfolio weightings are labeled in the third column. Red highlights are for sectors that were shorted through 2x inverse ETFs (Figure 13). Our long ETFs are either overweight (OW) or neutral weight (NW) relative to the Dow Jones Global Index.
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