is The DIAS Conservative Income Portfolio Still Conservative?


Posted in: Economics, General, Stock Market, Thought of the Week

The asset allocation for the DIAS Conservative Income (CI) portfolio has changed quite dramatically since 2010, back when it was purely a fixed income portfolio. The gradual shift towards higher equity exposure in the portfolio has prompted many investors to ask if it is still a conservative portfolio. In the past, equities have been used for capital appreciation rather than preservation. This is because equities typically carry more volatility in the short-term.

Our Investment Committee still believes that CI is conservative for three key reasons:

  1. The Risk Paradigm Has Changed. Over the last 30 years, most investors would have considered a bond portfolio consisting of investment grade securities and government bonds to be conservative. Bonds were popular because they gave continual strong returns and investors were certain that they would get their principal back. However, times are changing and the Fed’s zero interest rates are turning it into a much riskier proposition. Interest rate risk is looming and principal values of bonds will fall as interest rates begin to rise. Therefore, our Investment Committee has lowered our fixed income allocation in CI and shifted to bond sectors with low interest rate sensitivity.
  2. Liquidity is High. A vital component to overall risk is the asset’s “liquidity”, or how easy it is to buy and sell the asset. In the CI portfolio, every asset must have very high liquidity. The equity allocation within CI is comprised of highly liquid stocks that allow our Investment Committee to exit quickly if they feel that bad news is on the horizon. Bonds, on the other hand, are far less liquid than stocks because there is no major exchange for bonds. Most of the trading is conducted by matching a buyer and seller together through major brokers like Goldman Sachs and Morgan Stanley. Simply put, the equity portion of the CI portfolio is comprised of securities that can be exited smoothly if deemed necessary. High liquidity reduces overall risk.
  3. High Quality at a Low Price. Stocks are only included in the CI portfolio when they pass our Investment Committee’s rigid set of controls that the company’s financials and competitive positioning within their industry are top tier. Furthermore, they will only consider stocks that are trading at attractive valuations, and will sell those holdings that become too expensive to own. In other words, they only include the stocks that bring CI an attractive “risk-adjusted” yield, or the highest yield possible without sacrificing quality and/or valuation.

Recent comments from Janet Yellen have already implied that she has no intention of changing policy anytime soon. The net result of these comments is that finding income is going to get hard, and we will not likely see a return to normalized interest rate (4.5 – 5%) for several years. The asset allocation within CI has changed dramatically over the last three years in order to respond to the changing investment environment. However, the strategy remains the same – preserve capital as best as possible over the long-run.

Read this week’s Thought of the week to learn more about the CI portfolio and its allocations in this new investment era.

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As an Investment Advisory Representative working in conjunction with Global Financial Private Capital (GFPC) we are provided weekly thoughts on what is happening in the economy and the market. Written by our investment committee at GFPC we find these thoughts to be informative and interesting.