I have three portfolios that I help manage. They are listed over at Stockpickr.com. The big one is insurance stocks, where I serve as the analyst, and have a lot of influence over what is selected, but don’t make the buy and sell decisions. The second is my broad market fund, over which I have full discretion. The last is my bond fund, which doesn’t have an independent existence, but fills the fixed income role for the two balanced mandates that I run, in which the broad market fund serves as the equity component. I’m going to run through each portfolio, and hit the high points of what I think about my holdings. Here we go:
Bond PortfolioI sold our last corporate loan fund in early June. We made a lot of money off these over the past two years as LIBOR rose, and the discounts to NAV turned into premiums. New issuance of corporate loans has been more poorly underwritten. I’m not coming back to the corporate loan funds until I see high single digit discounts to NAV, and signs that credit quality is flattening from its recent decline.

The portfolio is clearly geared toward preservation of purchasing power. We have TIPS and funds that invest in inflation-sensitive bonds [TIP, IMF]. We have foreign bonds [FXC, FXF, FXY, FAX, FCO]. The Yen and Swiss Franc investments are there as systemic risk hedges. The Canadian bonds and the two Aberdeen funds are there for income generation. If energy stays up, Canada might never need to borrow in the future. I also have a short-term bond fund [GFY] trading at a hefty discount, and cash. Finally, I have a speculative deflation in long Treasuries. [TLT]

This is a very eclectic portfolio that has done very well over the last 24 months. This portfolio will underperform if any of the following happen:

• Inflation falls
• The dollar strengthens
• The yield curve steepens amid the Fed loosening
• Credit spreads tighten

The Broad Market Portfolio

There are four things that give me pause about RealMoney. First, there is a real bias toward sexy stocks, and commonly known stocks. That bias isn’t unusual; it plagues all amateur investors. Two, few players talk about bonds, and how to make money from them, as well as reducing risk. Three, almost everyone trades more than me. Finally, there is a “home turf” bias, where everyone sticks to their niche, whether it is in favor or not.

I try to be adaptive in my methods through careful attention to valuation and industry rotation. Underlying all of it, though, is a focus on cheap valuations. There are seven summary categories here at present, and then everything else. Here are the categories:

1. Energy — Integrated, Refining, E&P, Services, Synfuels. I am still a bull here.
2. Light Cyclicals — Cement, Trucking, Chemicals, Shipping, Auto Parts
3. Odd financials — European banks, an odd mortgage REIT [DFR], and Allstate [ALL].
4. Latin America — SBS, IBA, GMK. All are plays on the growing buying power in Latin America.
5. Turnarounds — SPW, SLE, JNY. Give them time; Rome wasn’t burnt in a day.
6. Technology — NTE, VSH. Stuff that is not easily obsoleted.
7. Auto Retail — LAD, GPI.

So far this overall strategy has been a winner for the past seven years. No guarantees on the future, though. In the near term, rebalancing trades could include purchases of JNY and sales of DIIB and SPW. Beyond that, I am waiting for a week or so to sell my Lyondell. It is possible that another bid might materialize. Allstate is also on the sell block, though, I might just trim a little. What makesme more willing to sell the whole position is the disclosure of an above average position in subprime loans.

Insurance

There is one easy play going into earnings season, and one moderate play. Beyond that, there is dabbling in the misunderstood.

Easy: buy asset sensitive life insurers, ones with large variable annuity, life and pension businesses. Who? LNC, NFS, SLF, MFC, PNX, PRU, MET, HIG, and PFG. Why? Average fees from domestic equities are up 5% over the first quarter, and the third quarter looks even better for now. Guidance could be raised. Away from that, the dollar fell by 2% on average over the quarter, so those with foreign operations (excluding Japan) should do well also, all other relevant things equal.
Moderate: no significant hurricanes so far. Given that there is some positive correlation between June-July, and the rest of the season, are you willing to hazard some money on a calm storm season? With global warming DESTROYING OUR PLANET!!!! (not, this is cyclical, not secular.) If you are willing to speculate, might I recommend FSL? They manage their business well, though they are new.

Beyond that, I would commend to you both Assurant (a truly great company that will survive the SEC), and Safety Insurance (investors don’t get the risks here, they are small, and management is smart).

Summary

Managing portfolios has its challenges. One has to balance risk and reward on varying investments. Sometimes the market goes against you, and you question your intelligence. But good fundamental managers persevere over time, and produce good returns for their investors. That’s what I aim to do.

Full Disclosure: all of my portfolios are listed here.

Late editorial note: where I wrote FSL above, I meant FSR.? Thanks to Albert for pointing the error out.