Flexible Approach to Growth and Income

12/02/2015 10:00 am EST

Focus: ETFs

David Fabian

Managing Partner, FMD Capital Management

David Fabian, money manager at FMD Capital, has just launched a newsletter, the Flexible Growth and Income Report, designed to help investors build diversified ETF and closed-end fund portfolios. Here, he discusses some of the initial funds included in his new model portfolio.

Steven Halpern:  Our guest today is David Fabian, money manager at FMD Capital and editor of the newly launched advisory service, Flexible Growth and Income.  How are you doing today, David?  

David Fabian:  I’m wonderful, Steve, thanks so much for having me.  

Steven Halpern:  First, could you tell our listeners a little about FMD Capital and explain why you decided to launch your own newsletter now.  

David Fabian:  Absolutely.  FMD Capital Management was actually started by my brother and me about three years ago now and we are a fee-only registered investment advisory firm.  

What we do is we write very frequently on many well-traveled investment Web sites about our love of exchanged traded funds, closed-end funds, and even certain mutual funds and so that’s really how we’ve been able to build a following of clients for our wealth management first.  

Along the way, of course, we’ve picked up quite a few readers of our blog that come to us on a weekly basis and we really created the new Flexible Growth and Income report as a subscription-based newsletter in order to bridge that gap between the free blog and the full blown wealth management service.

That way, those investors who are out there just doing it themselves that need a little bit of extra assistance with building a properly diversified portfolio can sign up for our new Flexible Growth and Income report for only $15 a month.

We do publish it in-house, so we’re not working with any third parties or anything like that; we really control the whole system from end of end.  It’s really just been a fantastic response since we launched it about two months ago and we’ve had many followers of ours compliment us on the value that it’s added over that time frame.  

Steven Halpern:  Over the last two months since you’ve launched the publication you’ve been scaling into positions in the newsletter’s model portfolio and one of the ETFs you’ve recommended is the Vanguard Extended Market ETF (VXF); what’s the attraction here?

David Fabian: Yeah, when we launched the service, we initially envisioned having anywhere from eight to 15 positions in the portfolio at any given time and we want to do a combination of both growth and income producing assets.  Now—in order to do that—we kind of need to break the portfolio up into both core and tactical positions.  

Originally when we launched the service two months ago we added the Vanguard Extended Market ETF, ticker symbol VXF, as one of our tactical positions and what VXF invests in are small- and mid-cap companies.  

It’s what called a completion index, so if you have your core S&P 500 stock ETF you can use a fund like VXF to add about 2500 small- and mid-cap companies all in one investment vehicle.  

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It’s extremely transparent, it’s extremely diversified, and it’s extremely low cost charging about 10 basis points annually, as everybody knows, Vanguard just does a fantastic job of keeping their expense ratios quite low.  

Really, the reason we recently added more of our portfolio to VXF over the last two weeks, or so, is because we do quite a bit of research and seasonality trends.  

One of the things that really popped up on our radar is how well small-cap and mid-cap stocks do at this point of the year. According to our research—and some of the other technicians that I follow out there—I’ve actually been able to confirm this with them, small-cap stocks during this period of time between about October and November all the way through March or April tend to outperform large-caps by a significant margin.  

This is kind of the time or the period of the year where it behooves you to add a portion to sort of overweight the portfolio more towards small-caps and that’s sort of what we’ve done at this point in time.  

So far, this year, that axiom has really proven true seeing quite a bit of additional momentum in small-cap stocks and that helps to kind of make up a large portion of the growth part of our portfolio at this point in time.

Steven Halpern:  Now, outside of growth, you’ve also gained exposure to high dividend equities through the iShares High Dividend Index ETF (HDV); what’s the story here?

David Fabian:  HDV is one of our favorites as well. This really makes up a core income producing position within our portfolio.  It invests in 75 large-cap dividend paying stocks.  Stocks like Exxon Mobil (XOM), Chevron (CVX), Johnson & Johnson (JNJ); the top three sectors in HDV are consumer staples, energy, and healthcare.  

Like its name, the iShare Core High Dividend ETF is a core income position in our portfolio.  It yields about 3.75% right now, which is a very strong number considering the S&P 500 (SPX) yields about 1.8%, so we are very happy with the income that it produces.  

Dividends are paid on a quarterly basis. With an expense ratio of only 12 basis points, it’s an extremely low cost position to own.  

Again, large-cap stock exposure, high dividend yields, and it really kind of compliments that VXF position, which is the growth component and the HDV, which is more of an income component in the portfolio.  

Steven Halpern:  And you also balance your overall approach with some exposure to bonds and one core holding that you have is the PIMCO Total Return Bond ETF (BOND); why did you choose this fund?

David Fabian:  One of our tenets of our firm is that we like to implement a multi asset approach that includes stocks, bonds, alternative assets like preferred stocks and REITs and then of course cash as well.  Those are sort of the four sleeves of our portfolio.  The first two positions we kind of talked about some stock exposure.  

The PIMCO Total Return ETF makes up a core bond allocation for us. What we’ve seen—and through our research over the last few years—is we’re big fans of indexing in the stock portion of our portfolio, but at the same time we have seen active managers on the fixed income side of the portfolio really outperform the benchmark.  

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The benchmark Barclays Aggregate Bond Index has significantly underperformed ETFs like BOND, which are actively managed.  Now you’re going to pay a higher expense ratio with BOND.  

Right now the expense ratio is right about 0.5% versus a diversified Barclays Aggregate Index ETF that you can get for about 10 or 12 basis points, but they have been able to add significant value in total return and a higher income stream over the last several years and so that’s really why we own this position in our client’s portfolio.  

Having that multi-asset approach, the fixed income sleeve is very important because it acts as a shock absorber for the equity volatility.  Our number one goal is capital appreciation, but we also want to have as low volatility portfolio as possible and so that fixed income sleeve with BOND really helps balance that volatility out.  

Steven Halpern:  Finally, you’re very well known as an expert in analyzing closed-end funds; perhaps you could walk us through one closed-end fund recommendation and help explain how you look at these vehicles.

David Fabian:  Absolutely. Our core expertise is exchanged is exchanged traded funds, but we have branched off in recent years to talk more and more about closed-end funds and this is really at the bequest of a lot of our readers.  

There are not a lot of guys out there talking through any real research about closed-end funds.  It’s very difficult to find a lot of information about these types of funds in the retail market place, but we feel that they offer tremendous value to our readers and our subscribers.  

One of the funds that we own in the flexible growth and income report is the PIMCO Income Opportunity Fund (PKO). Again, that’s ticker symbol PKO. This fund is managed by Daniel Isaacson, who is the top portfolio manager at PIMCO. He runs all of their global investment themes.  

It’s a multi-sector bond fund, so it’s made up of all different areas of the credit market.  It’s made up of treasury bonds. It’s made up of mortgage bonds. It’s made up of high yield securities.  

With closed-end funds, they’re able to use leverage in order to enhance the yield of the portfolio.  Right now PKO yields right around 10%, dividends are paid monthly to shareholders, and one of the advantages that we’ve seen right now is it’s trading at about 5.5 discount to its net asset value.  

When we look at some of the closed-end funds out there, we do quite a bit of research in regards to either them trading at a premium or discount to their NAV. When we see that fund is trading at a significant discount, we really put that as a high priority on our watch list.

We believe that it’s an opportunity for us to invest in for our subscribers and our clients and then we can potentially use that arbitrage to the net asset value to our advantage, so that’s why we really like PKO at this point in time.  

Steven Halpern:  Again, our guest is David Fabian of FMD Capital and editor of the Flexible Growth and Income newsletter.  Thank you so much for your time today.

David Fabian:  I appreciate it, Steve, thank you.

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