The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
Top Down Risk Control
10/04/2013 8:00 am EST
Mike Dever of Brandywine Asset Management, discusses the importance of having a truly diversified portfolio.
SPEAKER 1: My guest today is Mike Dever. Hi Mike and thanks for being here.
MIKE: Thank you very much.
SPEAKER 1: In your blog you talked about top down risk control. Can you tell us a little bit about what that is?
MIKE: Sure absolutely. Rather than putting a portfolio together and trying to control risk either through use of options strategies or something that might actually cost you money to control the downside.
SPEAKER 1: Stop losses?
MIKE: You can stop losses, correct? If you start at the top by creating a portfolio that’s truly diversified across 100 plus markets and return drivers, you end up, like in our case with our trading over 1000 strategy market combinations in the portfolio; each one has a small impact on the overall portfolios performance and risk. It’s really a function of starting at the top, creating broadly diversified, truly diversified portfolio. That gives you the best opportunity to get the highest return in a given level of risk.
SPEAKER 1: Are you looking at when you diversify the portfolio obviously through sizes of companies and through industries and sectors and all that, do you also do some stocks, some ETFs, some funds? How do you?
MIKE: In our portfolio we’re in about two dozen different stock indexes globally. The U.S. has got a handful represented in there, got to trade some mid-cap stocks and large-cap stocks, and then globally a number of other stock markets, but that’s about 20% of the portfolio. The rest of its made up of bond markets globally, currency trading, and commodities, so it’s really broadly diversified. Stocks just are one piece of the overall diversified portfolio.
SPEAKER 1: For an individual investor, say somebody that doesn’t have enough of an asset base to go to a money management firm. I mean what can they do? Where would they start at?
MIKE: On the website for the book at www.jackassinvesting.com we have an action section and in that action section we actually created what we call free lunch portfolios. Free lunch because it’s designed to give you better returns with less risk than conventionally 60/40 or other types of diversified portfolios. In that we have the simplified free lunch portfolio that lists just ETFs, positions that are rebalanced once a year. They don’t have to do trading, just set up ETFs they can buy into that give them that global diversification and exposure.
SPEAKER 1: That’s great because then they could use some currency, right? They could do some fixed income.
MIKE: Part of that portfolio, exactly.
SPEAKER 1: Are there any sectors in particular that you’re fond of right now or is that just like oh I kind of like them all.
MIKE: You know for us it’s whatever the trading strategies are indicating at the time, so it varies constantly. Whatever we might have an interest in today and say hey we’re favorable on. For example, we have long position right now, which has been counter trend at this time was the Australian dollar. You know it’s been getting bashed like crazy with all this worry about China and kind of fading and the commodity play in there, but that’s one of the long positions we have in the portfolio based on some of the other return drivers that we’re seeing that indicate that should be a higher play over the next few months. For us it varies on a day-to-day basis wherever the opportunities are.
SPEAKER 1: Like now yesterday the news came out about Europe and that Europe we think is finally out of a recession and you guys were probably in Europe a long time prior to this announcement.
MIKE: Yeah we’ve been on the European equity indexes. We’ve been long for at least a month or two now and those positions have been pretty steady in our portfolio through that time period. We did end up short about two weeks ago in U.S. equities based on sentiment and sort of a little bit over enthusiastic _____ U.S.
SPEAKER 1: Good timing.
MIKE: Yeah that was nice, that was nice, but yeah European indexes we’ve been long.
SPEAKER 1: Very interesting. Thank you for the information.
MIKE: You’re welcome. Thank you.
SPEAKER 1: Thanks for being with us on the Moneyshow.com Video Network.
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