2 Global Funds with a Large-Cap Tilt

08/17/2011 7:00 am EST

Focus: FUNDS

Joe Pitzl and Jason Good say retail investors can benefit from some exposure to large caps, including global stocks. They name two global funds with potential, as well as a Vanguard dividend fund.

Kate Stalter : We’re speaking today with Joe Pitzl and Jason Good of Intelligent Financial Strategies in Minnesota. I wanted to start by asking for your take on the current market conditions, and what you believe it’s crucial that individual investors know about these days.

Jason Good: We think what’s crucial right now, Kate, is not panicking and doing something that investors will regret down the road.

We saw this three years ago when market volatility picked up, and I think it’s really an opportunity to step back and assess whether the portfolio that you have is the best portfolio for you—one that you can sleep at night and also is positioned to help you achieve your goals.

We’re finding that for the most part, our clients have weathered the storm pretty well, but there are a few where we’ve had to reassess whether we need to reallocate or change their portfolio composition based on what’s going on right now.

You look at last week and I’m not sure you can explain; there’s reason for these big swings probably are based on fundamentals. There’s a lot of emotion involved in these big swings for the upside and the downside, so we’re trying to maintain a level head and not get caught up or not get our clients get caught up in a panic at this point.

Joe Pitzl: Just to add to that, too, Kate, times like this really highlight the importance of planning. In particular, we have a pretty strong belief that if you have cash needs over the next three years, that portion of your money shouldn’t be exposed to the market.

Swings are just too volatile, so clients that are in a withdrawal phase or a distribution phase from their portfolio do have the cash set aside, which provides a level of comfort and security to sit through it. Just taking the time to really understand how the portfolio is built, why it’s built the way that it is.

Some people are more receptive to those conversations than others, but it just kind of underscores the reasons and the rationale for doing the things that are being done.

Kate Stalter: Are there any particular funds or sectors or asset classes, anything that you are putting your clients into these days, given the current market conditions?

Jason Good: We’ve had a theme here really over the past year of shifting more on the stock side of portfolios, shifting more into larger company stocks, relative to where we’ve been in the past.

If you look at valuations on a relative basis today, large caps really around the globe, both in the US and foreign companies, we think are cheaper on a relative basis compared to small caps.

Before the last few weeks, and really all throughout the year, we’ve been paring back on our small-cap exposure. We maintain a pretty global portfolio, so up to as much as half or more of stock assets outside of the US...but also in the last few weeks here our positions in Treasury Inflation Protected Securities, and just our bond positions in general, have really helped, or at least cushioned the blow relative to an all-stock portfolio.

We really never advocate for an all-stock portfolio, regardless of the conditions. Part of that is predicated on one of the sayings that we like and kind of live by, which is, "The future is uncertain."

It sounds very obvious, but I think time and time again, investors tend to forget that. It’s important to hold a variety of asset classes that react differently in different environments.

So as far as adding new investments or new asset classes right now, we’re not really adding anything new. We’ve done some reallocating and rebalancing over the past few weeks here in this downturn; taken some from the bond side, as stocks are sold off to buy stocks, both US and foreign, but nothing really new as far as telling people to put a sizable chunk of their money in one particular area.

Joe Pitzl: To kind of underscore the uncertainty piece a little bit, too, a couple of weeks ago, when the US was downgraded, S&P was actually saying that US government treasury bonds and bills are a riskier asset than the people thought.

In reaction to that, instead of selling off those positions, people went and bought them. They bought more and they bought more for a higher price and a higher yield.

So it’s really counterintuitive. You can try and predict what’s going to happen, and I think a lot of people would have predicted that market would have been hit pretty hard, but in fact it actually, for some reason, was kind of a boon.

Jason Good: Some of the managers kind of use a mix of active and passive funds.

Some of the managers on the active side, they hold a sizable position in cash and some gold, as well. That has helped offset the recent downturn or recent volatility. So again that’s not a directional hit, that’s really just held there for portfolio insurance in times of uncertainty, which in my opinion, is always.

When there’s a crisis of confidence which I think we’re in right now, and it seems to be getting worse by the day, you just go and talk to the lay person, and there’s a lot of pessimism out there just about really everything.

We try to structure portfolios so it’s just not betting on one outcome. We think that’s very dangerous.

You look at a Japanese investor in the late 80s who saw the Nikkei go from 40,000 to 20,000, and then went all in on stocks because they’d already gotten cut in half. It’s been a rough period for that investor. I think this just underscores not betting everything on red or black on the roulette wheel.

With that said, I think your retail investor is clearly spooked right now, so if you’re going to make a decision or a change a portfolio, we would recommend just to think it through. Don’t do anything knee-jerk, and take some time to think it through.

If you are going to make a change, document it, write it in an investment policy, take a video of how you’re feeling right now and store that away for the next time when we’re in a boom period. What we see is, we’re so influenced by recency bias, or what just happened, and we really try to help our clients avoid that bias.

We’re subject to that as well, as humans, but overall clients are weathering the storm pretty well. Everyday is a new adventure right now, that is for sure.


Kate Stalter: Are there any specific funds or even individual stocks that retail investors want to take a look at in terms of their research right now, just to be prepared?

Joe Pitzl: We’re kind of tilting things, like Jason said, over the last six to nine months, to higher-quality companies that are paying solid dividends. Companies out there that you can buy whose dividend payment is actually higher than the interest payment on their corporate bonds.

With the bonds obviously, you don’t necessarily experience the same kind of growth...and obviously on the stock side, that’s not a given, as well. But some of the higher-quality companies aren’t just sitting on large amounts of cash. There are certain funds that tilt directly toward that type of a company and certain managers that look to buy that.

Jason Good: For example, a Vanguard Dividend Appreciation Fund we use in our portfolios, there’s an ETF version (VIG) and an open-ended fund (VDAIX).

We don’t buy a lot of individual stocks, but I think if you look at large-cap US stocks, such as Wal-Mart (WMT), Procter & Gamble (PG), McDonald’s (MCD), Coca-Cola (KO), you can put together a nice portfolio today with the dividend yields up to 3%, growing dividends. Again, that’s kid of where we’re tilting today.

On the fund side, one area that we are fans of, for the retail investor, is global allocation funds. Some examples there would be like a First Eagle Global (SGENX) or an FPA Crescent (FPACX).

Those types of funds have that flexibility to move around their portfolio. Today they’re more tilted towards large-company stocks as well, relative to the past. In general, again, the theme: Larger dividend payers, whether it’s through funds, ETFs, or buying the names individually, we think makes a lot of sense today.

Joe Pitzl: There’s a little bit of caution thrown in there, too, by just finding high-dividend-paying stocks. Once in a while, we’ll have a client call and say he found this stock that has a 16% or 17% dividend yield. You can look at it, and literally the reason to have a 16% or 17% yield is because it lost 90% of its value over the last three years.

So that doesn’t really say a whole lot of the dividend in and of itself. But the higher-quality companies is where we are.

Kate Stalter: Right, and you want the price appreciation along with the dividend yield, you’re saying.

Jason Good: You know, if we get that, that’s great, but we would expect that over a seven- to ten-year period in the next year or two.

When people try to tell you where they think they know the market is going, they’re fooling themselves. We don’t try to pretend that we know where things are going, but we can look at relative values.

There’s value there today—more today then there was ten years ago, to put it that way, when large-company stocks were pretty pricey relative to small companies.

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