In part 1 of our commentary we covered a great deal of critical fundamental developments, which are ...
Top Performer's Top Picks
05/18/2016 10:00 am EST
Using a proprietary ranking system, Stephen McKee – editor of Selections & Timing – has developed the top risk-adjusted performance rating among all newsletters over the past 20 years. Here, he explains his strategy and highlights some top-ranked funds and stocks.
Steve Halpern: Our special guest today is Stephen McKee, editor of SelectionsandTiming.com, a group of industry-leading newsletters. How’re you doing today Steven?
Stephen McKee: It’s a great day.
Steve Halpern: Well, thank you for taking the time. Now, your no-load mutual fund newsletter has been ranked as the number one risk specific performer among all financial newsletters over the last two decades. Can you explain the strategy underlying this incredible record?
Stephen McKee: Yeah, I appreciate that. It’s good to talk with you again. We do basically two things. We rank mutual funds on our proprietary metric called C -- which is the risk adjusted relative performance number.
The whole idea is that you want to invest with the leaders and avoid the lagers and even in the same strategy or the same style, there’s a huge difference between the leaders and the lagers and so we rank the funds and try to stay with the leaders.
The second thing we do, is we believe in asset allocation -- some people call it market timing -- and the idea here is there are times to be in the market and there’s times to be out of the market.
And we practice a rotation strategy where we look at, you know, the stock market, the bond market, precious metals as well as cash.
And as everybody knows who’s been investing for more than ten years, you know the market goes into bear markets and if you can stomach losing half your money, then, you know, you want to look at buy and hold, I suppose.
But if you don’t like that idea, then that’s part of what we do and why we’ve built such a great track record.
Steve Halpern: Now, I understand you use a proprietary system to help separate the potential market leaders from the lagers and I don’t want you to give away too much of that system, but is there something you could maybe walk our listeners through, some of the factors that are involved in this system?
Stephen McKee: Sure, you know, I can tell you what it doesn’t look at and I’ll toss in beforehand that, if you are a buy and hold forget type of investor then internal expenses are going to matter.
We just did an article on it and people should find it very interesting, again, if you’re a buy and hold and forget type of person, internal expenses matter and that’s over a 15, 20, 25, 30-year timeframe.
If you are someone who was more connected, proactive, trying to get the most return and the least risk, then you want to consider other things not necessarily the fees, because the numbers are net of those things.
We also don’t look at concept investing. Most people know the internet boom of the 2000s and the dot com explosion and implosion, so we try to avoid those types of things and basically what we do. Oh, and then the other thing we try to avoid is the manager’s name.
Someone builds their 10-year track record of outperforming the S&P, he shows up on our system and I can recall saying, “Hey, we’ve got him on a sell and everybody is well, gee, what about his ten year track record? Well, like a mutual fund, it went down with the rest of the market in 2008.
Instead, what we look at is just the pure numbers. They say “Is this manager making me money and is he doing it or she doing it based on the amount of risk that they’re taking.
And so we look at a risk-adjusted relative performance number and plug all of that in and out comes the results and we try, again, to stay with the leaders and avoid the lagers.
Steve Halpern: Looking at potential market leaders, can you perhaps touch on a few specific mutual funds that you currently view as buying opportunities?
Steven McKee: Sure, we look at mutual funds in this letter and it comes out monthly as well as ETFs, so basically got a couple of names in our balanced area, for example, we like Hennessy Balanced Fund (HBSBX), we do own it.
Another one is American Century Asset Allocation (AONIX). Again, whatever they’re doing, they’re at the top of the leader board, so we’re invested with them.
And as long as they remain at the top, whatever their allocation, whatever their percentages, 50/50, 60/40, large cap, small cap, whatever they’re doing, as long as their risk adjusted relative performance numbers are there, we want to invest with them. So, we like them.
In the aggressive growth area, of course, gold has been zooming here lately and the name there is the US Global World Precious Metals Index (UNWPX) and, again, we look at these things monthly and right now, gold you’re getting rewarded for the amount of risk you’re taking. A year ago you weren’t, so we didn’t own any gold.
Another area are the utilities. In the income, we like foreign bond funds like PowerShares Emerging Markets Sovereign Debt Portfolio (PCY); it’s an ETF. And then also iShares IBoxx $ Invest Grade Corporate Bond (LQD); it looks at domestic bond funds or bonds.
Steve Halpern: If I understand it correctly, in addition to assessing funds, your proprietary system also applies to individual stocks, is that correct and can you touch on a few specific stock names that you currently find interesting?
Stephen McKee: Yes, in the stock area, it is sort of the same idea. Again, we believe that there’re times to be invested in the market and there’re times to be out and how we do that is we include cash as a potential choice.
Again, when the market’s dropping, you are getting the most risk and the least reward, so what would happen is cash, even though it might only be paying half of 1%, it’s providing the most return for the amount of risk.
We apply that same concept to the stock market and say, okay, we try to take a deep value approach where are those companies that are providing that type of return and right now we’re finding them sort of few and far between, with more of a special situation type approach.
To give you an example, there’s a couple of companies that are liquidating and, again, we own some of these. One of them is Winthrop Realty Trust (FUR).
They just made a $2 distribution. They’re in the liquidation process and it’s trading around $10.64 and presumably, based on their latest information, they’re supposed to liquidate and it’d be around $12.16 and do it over the next year, year and a half or so. So, that’s sort of a special situation.
Steve Halpern: That company you said is called?
Stephen McKee: It’s Frank-Universe-Rabbit, FUR.
Steve Halpern: Okay.
Stephen McKee: Another one in that same area is Ashford Hospitality (AHP). They did a reassessment. They’re making some changes. They’re doing some buy-backs, so again sort of a special situation.
One of the other examples of stock you look at and, again, we own these things, full disclosure, Gencor Industries (GENC) has gobs of cash on the balance sheet and no debt.
And it’s in infrastructure rebuilding, roads and bridges and the government just passed their five-year highway funding bill, so this type of a company should benefit. It’s already moved up, but we expect even more to come.
Steve Halpern: Again, our guest is Steven McKee of SelectionsandTiming.com. Thank you so much for your time, today.
Stephen McKee: Thank you, I enjoyed it.
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