Last month I asked in these pages, Is This An Epic Bear Market Breach Or Flash In The Pan? My answer to the question is that no one really knows what millions of investors will do tomorrow or the next day, week or month, but the warning signs of impending volatility and disorder were indeed troubling. Our response was to begin liquidating a substantial portion of our long portfolios and adding a like percentage of downside hedges. Those actions are now complete. We are roughly market neutral. But that doesn’t mean we are willing to step away from the rewards the market itself can provide, even in a market neutral portfolio.Â
Over the last couple of decades, more than 70% of the total market return has come from dividend income. Much of this “dividend income†is really interest from fixed income investments that is packaged by ETFs and closed-end funds and received as dividends. Some of it, as well, comes from preferred shares, where the income amount paid is fixed but, again, is considered dividend income.Â
So while we wait on the sidelines, fearing neither market ruin nor lamenting any loss of possible gain, we have created “The UN-Beta Portfolio†for our clients and ourselves. Our “happy to stand by while things shake out in the next few months†holdings now look like this…
Up to 50% in fixed income. This includes sovereign bonds of developed nations that are now embarking on their own QE, keeping their bond yields low and creating a floor under their prices;  investment grade US municipal bonds; and US multi-sector bonds that have little or no correlation to US stocks and look like great holds if the Fed is constrained this year in raising rates. Of course, there are many venues to invest in fixed income assets. Our choices are typically bond mutual funds, bond closed-end funds, and bond ETFs.
30% plus or minus long positions.Long, yes — but here is where The UN-Beta Portfolio differs from the typical long-side portfolio, whether that other portfolio holds the FANGs, blue chips, or dividend aristocrats. No matter how wonderful the dividends of common stocks, it is all moot if the price of the stock plunges. Yes, you received 4.1% in a rock solid dividend. Too bad the company’s shares plunged 25%. Our longs in this portfolio are long/short funds, which tend to have a modest long bias but offer great downside protection;  preferred shares, which can fluctuate considerably in price but almost never as much as the issuing company’s common stock; utilities that offer good yield and good valuation metrics; and REITs that are typically underwhelming in frothy bull markets and thus cheap today.
