Asset Allocation 1st Quarter 2019
Investment Strategy Network has added another dimension to the asset allocation process. Traditionally, increasing stability or advancing opportunity (risk/return) has been accomplished through adjusting allocations amongst cash, bonds and stocks. Bonds are increased to improve stability, reduce risk and stocks are increased when opportunities are sought along with a willingness to accept higher fluctuations in value levels (volatility). Individual stock selection can also be adjusted along with the asset allocation to enhance stability or improve opportunity. By using the two as an integrated combination rather than individually, greater alternatives are available and more opportunities are generated.
Source Library: Mid Caps Less Risky Than Large Caps?
Jodie Gunzberg, Managing Director at S&P Dow Jones Indices has written an excellent article about USA MidCap stock behavior. We found it interesting that earlier this year MidCap stocks had become overvalued and well ahead of LargeCap stocks. The MidCap stocks valuation corrected earlier this fall and returned to a lower relative valuation prior to November. In November MidCap stocks demonstrated the signs of lower volatility than their LargeCap colleagues which is discussed in Ms. Gunzberg’s paper. It will be interesting to see if there is a relationship between our relative valuations and increased or decreased volatility within an asset classification.
Economic: USA Corporate Profitability
The turn in corporate profitability is not negative, just slower. Given the slower corporate growth rate and earlier equity overvaluation, it is not surprising that the market adjusted to a more realistic expectation of the future.
Investment Strategy Today
USA GDP increases to 3.5% 3rd:Qtr (2nd est) Corporate Profits increased 3.4%. Eagle Bancorp, Equitrans Midstream and MasTec added to service and fair value assigned, Coherent, Facebook, Goldman Sachs and John Bean Technologies (not L.L. Bean) earn BUY considerations while Lamb Weston gets a SELL consideration.
USA Allcap Stock Only Model
Recently, Mosaic, Inc. [MOS] (see Figure 3) became overvalued and was removed from the portfolio. The stock contributed nicely this year with a gain of over 30%. It is being replaced by Consolidated Communications [CNSL] and H&R Block [HRB].