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Astoria’s Portfolio Construction Thoughts

One of Astoria’s goals for 2021 is to communicate portfolio construction thoughts with investors on a more systematic basis. In this ‘CIO Thoughts’ piece, our aim is to deliver several topics in an easy-to-read language, which hopefully leads to more fruitful conversations and meetings with our investors.

Before discussing Astoria’s ‘CIO Thoughts’, we wanted to alert you that Astoria’s Quantitative Strategist, Nick Cerbone, has updated our Portfolio Construction Dashboard, which is stored here (click here; if you don’t have access, please let us know and we will sign you up). All of our models, fact sheets, and in-depth tools are stored on this dashboard. It’s definitely the one report we are most proud of delivering to our clients. While we have no way to verify this, we believe we could be one of the only firms delivering this level of analysis to our investors.

In our view, there are a few portfolio construction topics that should be paramount for investors’ portfolios.

  • We have argued since July 2020 that the US economy is in the early stages of a new, powerful economic cycle (click here). We think investors should be moving down the market cap range. We’d suggest trimming Large-Cap index ETFs and Large-Cap Growth ETF exposures. SPSM and SPMD are two cheap, low-cost ETFs for Small-Cap and Mid-Cap exposures, which we are using in our strategic ETF models. They use the S&P quality filter (requires 4 quarters of net positive earnings before being included in the index) which Astoria views positively.
  • Don’t fall in love with past winners.This is important. Investing is about looking in the future and not in the rear-view mirror. We have seen this movie many times in our careers. For instance, investors are convinced that the FAANG stocks, or more broadly, the US stock market, will continue to outperform in the future in a similar risk adjusted manner as they did in the past. However, in reality, when the economic cycle turns (as it did last year) is when you want to be tilting away from US Large-Cap index beta and into foreign indices, which, by construction, are more levered to the global economy. Astoria believes that strategically, the best opportunity in the next 12-15 months is in Emerging Market stocks and China in particular (click here to see our CNBC interview from Jan 2020).
  • Be careful with bonds. Bonds delivered high income, provided a ballast to one’s portfolio, and provided some element of carry over the past 5-10 years. Don’t count on this repeating in the future. If you are long a lot of bonds, we suggest at a minimum hedging your inflation risk. We put together a portfolio of inflation sensitive assets to hedge bond portfolios. In this basket, we include TIPS, physical commodities, commodity equities, and inflation sensitive stocks. Adding a 10% sleeve doesn’t dramatically alter the risk dynamics of a 60% equity / 40% fixed income portfolio (we are happy to send you our analysis).
  • Don’t hoard cash. As you know, we think inflation is on the margin rising (click here and here). Owning a lot of cash isn’t a good idea either. You don’t want to erode your purchasing power. Buying real/hard assets along with commodities is going to help preserve the value of your dollars. We are fans of owning physical real estate (excellent carry, depreciation write-offs); there are ETFs if you prefer not to deal with those leaky faucets!
  • Diversification is key. This is crucial. We were constructive back in March 2020 when virtually most of our peers were bearish (click here, here, and here). However, valuations have skyrocketed and have pulled forward future returns. We suggest moving forward but with caution. Critically, we believe portfolios should be:
    1. Geographically diversified
    2. Diversified across various currencies (USD, JPY, EM FX, and EUR)
    3. Diversified beyond stocks and bonds. For instance, in our Enhanced Income Model, we own preferreds, EM Debt, convertible bonds, REITs, and other non-traditional stock and bond instruments. We think investors should start to become comfortable with other asset classes besides stocks and bonds.
    4. Include commodities (not just gold, but silver, gold miners, copper miners, and metals & mining equities)
  • Look for idiosyncratic stories in your portfolio. It’s nice to own a tight 10-12 ETF model portfolio for most ‘set it and forget it’ clients. However, there is a particular group of investors who require alpha or idiosyncratic stories. Here are a few themes which are included in Astoria’s Disruptive Growth ETF portfolio:
    • Genomics/Biotech
    • Innovative Technology
    • Self-Driving Cars
    • Robotics/AI/Machine Learning
    • Cloud/Internet of Things
    • Virtual Healthcare
    • Fintech
    • VR/Gaming
    • 3D Printing
    • Clean/Renewable Energy
  • We view Disruptive Growth as idiosyncratic compared to traditional stock and bond risk. We argue that traditional stocks and bonds will be impacted by traditional macroeconomic metrics such as inflation, the US 10-year, and Fed policy. Is a biotech or clean energy company going to be impacted by the latest CPI measure? In our view, not nearly as much as a Utility or a Large-Cap Growth stock. We want our advisors to have more idiosyncratic stories in their portfolios as stock/bond correlations have increased in recent years. We think this is better than having investors buy Telsa, GameStop, or Dogecoin.
  • Also, Nick Cerbone recently released a report highlighting the key fundamental & quantitative ratios for our ETF holdings. Given our quantitative and cross asset background, we actually ‘look under the hood’ to pick the solution which matches our research framework (i.e., high quality, high earnings growth, etc.). You can read more about the key metrics in this blog (click here).

For instance, below is a list of the valuation ratios for various ETFs we utilize.

Key Ratios of Equity ETFs: Sorted by ROE

Source: ETFAction. Data retrieved on January 22, 2021.

Best,
Astoria Portfolio Advisors

Astoria Portfolio Advisors Disclosure: At the time of this blog’s publication, Astoria held positions in XLK, DGRW, IHDG, VUG, QVAL, XLV, USMV, MTUM, ITB, SPY, DGRE, MCHI, EES, HERO, VOT, IEMG, SPMD, SPEM, CQQQ, SNSR, IEFA, SPDW, DRIV, ROBO, KBWB, MLPA, SPSM, NETL, ARKF, PRNT, FBT, XITK, ARKG, EDOC, IPO, WCLD, XBI, and PFF on behalf of its clients. Any third-party websites provided on www.astoriaadvisors.com are strictly for informational purposes and for convenience. These third-party websites are publicly available and do not belong to Astoria Portfolio Advisors LLC. We do not administer the content or control it. We cannot be held liable for the accuracy, time-sensitive nature, or viability of any information shown on these sites. The material in these links is not intended to be relied upon as a forecast or investment advice by Astoria Portfolio Advisors LLC and does not constitute a recommendation, offer, or solicitation for any security or any investment strategy. The appearance of such third-party material on our website does not imply our endorsement of the third-party website. We are not responsible for your use of the linked site or its content. Once you leave Astoria Portfolio Advisors LLC’s website, you will be subject to the terms of use and privacy policies of the third-party website. Refer here for more details.

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