MichaelFabian

Michael is a managing partner at FMD Capital Management. a fee-only registered investment advisory firm specializing in exchange-traded funds. Michael is the leader of the FMD investment committee where he implements actively-managed income portfolios using ETFs, mutual funds and closed-end funds. His investment philosophy is aimed towards designing portfolios that are low in volatility while still providing a high income stream, then shift in response to changing market environments. He also implements active risk management practices to protect his investors from ultimately experiencing a large loss. He regularly contributes his views on wealth management in his company blog. podcasts and special reports. You can follow Michael on Twitter @fabiancapital or email him at Michael@fmdcapital.com.

Michael ‘s Latest Posts

In the world of investing, the most considerable factor in reaching your end goal or objective is fine-tuning the proper asset allocation.

Over the years, with the advent of exchange-traded funds, investors have seemingly graduated from simple 60/40 balanced funds to more sophisticated strategies whereby they take a hands-on approach to control the harmony of stocks and bonds within their portfolio. We are led to believe this will boost returns. yet when I review the small cross-section of investor portfolios that contact our firm, I am still shocked by the large amounts of cash without a predetermined game plan. In my opinion, investors with moderate experience or portfolios with too much cash can use balanced funds for traditional beta exposure or as a way to gain access to a more exotic strategy altogether.

This year began like any other, with fears that such a massive run-up in stocks could be signaling the end of a historic bull run.Yet as the months passed, the resilience in stocks and the resurgence in bonds surprised even the most adept portfolio managers.The correlation between stocks and bonds this year has been truly awe inspiring, and although we don’t have an answer as to which asset class may be the right one during the next corrective phase of the market; owning both in tandem has been a rewarding experience.

One reason I believe investors get so hung up on where to put their cash is because they can’t decide whether they want pure stock exposure, or another boring bond position in their account.This in-turn could lead to missing out on the next move if chosen incorrectly. In addition, the follow-on effects of a poor decision could lead to more frustration that result in a loss of confidence in managerial fortitude. Instead, depending on the existing asset allocation or income versus growth objective, an investor could have put that extra 10% to 20% cash position in one of the iShares allocation ETF’s such as the iShares Conservative Allocation Fund AOK, +0.31%  or the iShares Growth Allocation Fund AOR, +0.70%

The beauty of selecting a diversified ETF is that every single holding is transparent and easily researched.In addition, if the market does eventually find itself reconstituting toward one asset class over the other, the fund is likely to remain relatively buoyant. Furthermore, an ETF is very easily disposed of, whereby an investor can reassume their cash position without any short-term redemption fees or other exit drama.

A rhetorical question I’m often reminded of that fits this stock-bond tug-o-war emphatically well is: Would you rather be right, or would you rather make money?

The hunt for alpha

Index advocates and active management haters will most often tell you that basically 90% of funds lag their benchmark. However, there are many easily accessed balanced funds that have very long track records of beating their relative benchmarks. With some basic screening and research, you can select a manager that works within your desired asset allocation framework such as, conservative, moderate, or aggressive allocation.

The key to analyzing and then selecting an alpha-seeking balanced fund is knowing how to analyze their fixed-income and equity sleeve construction criteria.For example, a more aggressive balanced fund might allocate their fixed-income sleeve to lower rated high-yield securities, which could eventually subject the portfolio to more volatility if risk assets decline. Whereas a more conservative balanced fund might opt to deploy their bond sleeve in U.S. Treasury or highly rated mortgage backed securities with the hopes to offset any impending equity volatility.

Good examples of this type of juxtaposition include funds such as the Osterweis Strategic Investment Fund OSTVX, +0.59% which uses high yield securities in their bond sleeve, alongside the T. Rowe Price Capital Appreciation Fund PRWCX, +0.90% which has larger allocations to Treasury and investment grade corporate securities. Discerning this difference in strategy is important, since both funds are categorized in the moderate allocation genre.

When it comes to an equity sleeve within a balanced fund portfolio, most examples I analyze use traditional bottom-up or top-down fundamental stock picking criteria.But looking past the differences of individual manager and firm viewpoints will yield very different characteristics. More specifically, the level of diversification or focus on market capitalization plays a pivotal role in overall fund dynamics.

For example, knowing that a portfolio dominated in small and midcap equity securities exhibits more volatility; investors seeking a large-cap tilt might choose the famed FPC Crescent Fund FPACX, +0.51% over the Villere Balanced Fund VILLX, +1.23% Despite the differences in makeup, both funds have displayed fantastic long-term results. In addition, conservative retirement investors seeking income may prefer exposure to megacap and blue chip names included in the Vanguard Wellesley Income Fund VWINX, +0.31% or the Berwyn Income Fund BERIX, +0.29%

One final fund I feel deserves a strong mention, yet isn’t as readily attainable, is the Bruce Fund BRUFX, +0.73%  .The catch is you won’t find this fund offered at your discount brokerage firm or stuffy investment bank. Investors are forced to go directly to the distributor, which I think offers an old-school type of mystique that has largely kept this mutual fund out of mainstream hands. As a result, the fund has remained a manageable size, and the father/son management team can then carefully research and implement their own unique themes on behalf of their investors.

One of many things I like about the fund is the relatively simplistic approach of seeking out companies with debt and/or equity opportunities that are fundamentally easy to understand and explain. Subsequently their 10-year track record is one of the best in the industry, and as a result I always find the time to read their annual and semiannual note to shareholders posted on their website.