Taking A Top-Down Approach

Nusbaum starts by carving up the S&P 500. He underweights or equal-weights the 10 major sectors in the index. Those decisions are based on where he perceives markets are in terms of economic cycles and other geopolitical factors in the world.

“I believe in taking a top-down strategy. And the most important decision in that process is when to be in the market and when to be out of the market. For that decision, I rely on the 200-day moving average for the S&P 500,” said Nusbaum.

He then drills into each sector once an overall investment theme is formulated. For example, despite the recent comeback by financials, Nusbaum says he can’t build a very strong fundamental case for owning many banks. “So I own only individual stocks right now in financials. It’s a situation where unless you’re looking to make short-term trades, financial ETFs are just too broad right now,” he said.

Nusbaum has slight overweights in telecom, utilities and materials. He’s using funds such as the Vanguard Telecom Services ETF (NYSE: VOX), the iShares S&P Global Utilities Index (NYSE: JXI) and the iShares S&P Global Materials Index (NYSE: MXI) for part of those exposures. With commodities, his target weight is 4-5%. He’s using the SPDR Gold Shares (NYSE: GLD) and the PowerShares DB Agriculture ETF (NYSE: DBA) to cover that corner of the market.

“Over time, I can see inching our commodities exposure up an additional 2%. But in the near term, I have no plans to do so,” said Nusbaum. “And that’s not a technical decision, it’s a purely fundamental one.”

Despite the tremendous run by commodities in this decade, he says that equities still present the most potential for outperformance over the longer term. “Every 30-40 years, we have decades like this where equities really do poorly relative to other asset classes,” said Nusbaum. “We’ll probably run into another down period in 30-40 years.”

He believes that the U.S. economy is most of the way through its recovery process following the bear market that lasted from mid-2007 up to this March. “If we’re most of the way through the worst of the downturn, a long-term plan of owning a lot of commodities doesn’t make a whole lot of sense,” said Nusbaum.

He expects inflation to heat up, but not necessarily to hyper-levels as some pundits are suggesting. His own belief is that the U.S. will see prices rise on average of around 5-6% on an annualized basis in coming years.

“Although inflation might become more uncomfortable in the future, we’re not at the point where people need to worry. It’s likely that inflation rates will become a little uncomfortable – but not in the hyperinflation range,” said Nusbaum.

In addition to being underweight equities, he’s also underweight fixed income. Nusbaum believes prices on Treasuries are too high right now. “We don’t try to trade fixed income for capital gains. We try to use it to offset portfolio volatility. With that type of an approach, it makes sense for us to wait until prices come down,” said Nusbaum.

He’s also underweighting corporate issues. “Despite the bounce-back by stocks, the fixed-income market is still broken. So I’m not willing to make big bets on corporate issues in order to gain higher yields at this point,” said Nusbaum.

-- This report was submitted by IndexUniverse.com's Murray Coleman.

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