Portfolio Review (Q1/2011)

We entered the quarter positioning client portfolios in line with the thesis that equity markets would continue to rally, albeit with minor corrections along the way.

Our equity models indicated that emerging markets would regain leadership, after temporarily underperforming during Q4/10.

In fixed income, we remained over-weight in high-yield bonds, invested modestly in corporate convertible notes, and continued to short US treasuries on the expectation of rising interest rates.

Finally, we prepared for the possibility of an outlier event such as renewed Euro debt crisis flare-ups, China tightening, or bond vigilantes attacking credit markets.

Q: What worked?

Our expected scenario of continued equity market gains was realized during Q1, albeit with a temporary dip intra-quarter when an unforeseen set of revolutions broke out across a number of countries in the Middle East.


– US equities performed positively, delivering the highest equity returns for the quarter.
– Positions in energy and commodities outperformed even equities.
– Fixed income, real estate, and currency holdings delivered positive gains, albeit lower than equity returns.
– We effectively used our new Volatility Timing Model (VTM) to hedge portfolios and blunt declines during the 7% intra-quarter dip.

Rolling out our new Volatility Timing Model (VTM)

Our investment team has just completed 9 months of research and testing to design a new Volatility Timing Model (VTM).

VTM tracks volatility in the S&P 500 and helps us identify potential short-term turning points.

VTM will be used to identify high probability scenarios for adding protection in overheated markets, and for increasing risk when markets may climb higher.

Q: What didn’t work?

Almost all investments delivered positive returns for the quarter. However, our overweight holdings of Emerging Markets equities were outpaced by US equities.

US outperformance started in mid-November 2010, but appears to have peaked during late February.

Heading into Q2, we will track whether Emerging Markets equities continue to re-accelerate, and if they may potentially recapture relative gains surrendered during Q1.

Additionally, our diversifier funds delivered little return during the quarter.

These investments are mainly held to protect against bear markets and outlier events (popularly called “black swans”), but we would like to see them contribute modest returns as they have in the past.

We will watch these holdings to determine their ongoing effectiveness, and have a number of meetings lined up with new product providers to compare their options against our existing group of alternative diversifier funds.

Net Results

Our diversified portfolios once again delivered positive returns in the quarter, with many clients achieving all-time highs in their portfolios.

Additionally, the hedging success of our new VTM strategy during the 7% intra-quarter dip was encouraging.

Continued development of this model should not only help deliver outperformance during dips in bull markets, but will also bolster our set of tools to defend during major bear markets.

We applaud our clients for continuing to grow their earnings and savings, while we focus on real, long-term, risk-managed growth of their portfolios.