Here are some new investments that those saving for or living in retirement might consider for their...
2 Funds Geared to Wealth Preservation
07/17/2012 6:30 am EST
Innealta Capital’s Mark Mowrey explains the strategy of his firm’s funds, which rotate into and out of the best sectors and countries, based upon rigorous analysis. Mowrey also discusses how the funds are risk-averse by design.
Kate Stalter: Today’s guest is Mark Mowrey, portfolio manager with Innealta Capital Funds. Mark, I know that you’ve got a couple of funds that we want to talk about today. You’re focusing on Sector Rotation (ICSIX) and Country Rotation (ICCIX). Describe the funds and their objectives, and we can drill down into some of the specifics.
Mark Mowrey: The first thing I want to make sure to get across immediately is that the funds are multi-asset class. And maybe I’ll back up even a little further than that and talk about the quantitative framework that pretty much drives nearly all of the decision making that we do in regard to asset allocations.
We like to, and we do, look at and review individual equity classes, and this will be in regard to both sectors for the one fund, and countries for the other fund, on an individual basis.
We look at each of those equity markets in terms of the risk that we see inherent in that market; and by risk—at some very basic level—we mean the volatility of the price series. And then the fundamentals that present in that market. When we say fundamentals, we mean things like earnings, dividends, cash flows, and the sort.
With those two as the underpinning of the review, we layer on top of that a review of the macroeconomic environment. And as the very end, we kind of add in a little bit of momentum review, too. That’s sort of the last little bit of either push-in or push-out of an individual equity slice.
So starting with that, we will review individual equity markets on a risk-adjusted potential return basis, relative to a fixed-income portfolio that we actively manage, too.
The foundation of both of these funds is a fixed-income portfolio that is identical between the two. From there, we layer in equities when we believe the environment for that particular equity class—be it individual sector or individual country—is such that we believe taking on the risk that that equity market presents is worth the return that we see as inherent in that equity market, as well.
The decisions are binary. We are either in that market or we are out of that market. And again, it is based on a quantitative framework that we review on a daily basis.
Kate Stalter: Let’s break each of these down a little bit further, talking about the Sector Rotation fund for a moment. Can you say what sectors you are seeing potential in at this moment?
Mark Mowrey: Sure. To go back a little bit, there are ten sectors that we follow based on a generally standardized classification system. Of those ten sectors, we currently have one turned on. That is the energy sector.
And again in all these portfolios, we utilize only ETFs when investing. And again, these ETFs for the sector rotation portfolio are based on the ten GICS—Global Industrial Classification System—sectors.
So, we have that particular ETF turned on. Otherwise, we are invested in a broad, diversified allocation of fixed-income funds that are mostly focused on the US corporate space. But we also have layered in an aggregate slice, as well as local currency-denominated emerging-market fixed-income funds.
Kate Stalter: Let’s talk about the other fund, the Country Rotation Fund. What regions are you looking at these days?
Mark Mowrey: For this particular fund, we review 31 different countries—again, on an individual basis. We can invest in up to 20 in a particular fund; meaning we could invest in 5% of an individual country at any individual time within this particular fund.
Currently, we have turned on only Russia—not necessarily so surprising, given the fact that we have energy turned on in the sector, and energy is a very important component of the Russian economy. But that is the only country allocation we have currently turned on in the country rotation portfolio.
Kate Stalter: One of the key factors that you are focusing on—and this is of great interest to investors these days—is the idea of wealth preservation. Can you talk about that a bit, Mark?
Mark Mowrey: Sure. At the very core of all of what we do is the sort of notion of winning by not losing. So we are, broadly speaking, a risk-averse strategy.
At the forefront of all of the analyses we do—not only on the equity side, but also on the fixed-income side—is the risk inherent in that individual position. And that risk can be qualified, but more often than not, it is quantified.
It starts at the price series: How volatile is the price series? But we also layer in, by the quantitative framework, many other sorts of analyses that can be qualified as risk, as it were, in regard, again, to any individual position.
This wealth preservation comes across very specifically in our portfolios—at least the intention is—by avoiding undue risk when seeking return in the individual portfolio. So we look to win by not losing by stressing lower volatility positions both at the individual context and in the context of the portfolio as a whole.
Kate Stalter: How do you normally see investors using these funds? Is it individuals, or is it advisors putting their clients into these funds?
Mark Mowrey: Again, these two mutual funds are relatively new for us. The inceptions were at the end of last year. Generally speaking, I don’t necessarily know that I have great detail in terms of who is currently using them so far.
How we have seen the strategies used, though—because we do actually manage these as individual accounts—we see them used as sort of alternatives to an individual or a core allocation that is broadly diversified. So these are the sorts of allocations you might add to a portfolio to reach out into markets that you might not otherwise have either existing or potential exposures to.
So you might have, for example, an existing diversified risk-oriented allocation that is multi-asset class, be it a mix of fixed income and/or US or global equity. Let’s say you wanted to be able to add some sort—and here is a key word here for how we pitch these strategies—tactical allocation that has the ability to either increase or decrease your equity allocation, based on some either qualitative or quantitative context.
Ours is quantitative. What we allow—both these portfolios can be at any individual point 100% invested in fixed income, or 100% invested in equities. So it allows the injection into a portfolio this sort of tactical allocation shift between fixed income and equities.
Related Articles on FUNDS
Inflation favors value stocks, especially small-cap value stocks. In line with our expectation of ri...
I like Leuthold Core Investment (LCORX) in this late stage of the economic and investment cycle, exp...
In the ongoing tug of war between large- and small-cap stocks, the latter has recently gotten the up...