Tactical Asset Management
When it comes to investing, I prefer a “tactical asset management” approach. Tactical asset management is an active type of asset management that adjusts allocations across different asset classes and market sectors.
Before 2008, many investors took a passive “buy and hold” approach to investing. You simply bought stocks for the long run and held onto them and way went up, up, up! When a bear market came along no worries, it won’t last long. Soon enough, a new bull market kicked in, and investors kept holding on.
That was all good and well until “buy and hold” turned into “buy and lose”. The 2000s were called a “lost decade” for a reason as the S&P 500 lost nearly -1% in value from 2000-2009, including dividends. The financial collapse of 2008 wrecked many investors’ portfolios and many retirement dreams turned into nightmares. The “buy and hold” crowd was faced with two choices: either sell stocks with huge losses, or hold on and hope for the best.
Tactical asset management is a response to the changing landscape on Wall Street. Active management can help investors exploit market volatility and take advantage of short-term performance momentum. Instead of sitting back and waiting for stocks to move higher, this approach moves assets in and out of sectors to try and profit from present and near-term conditions.
One way to utilize tactical asset management is to employ a sector rotation strategy. This is a dynamic effort to shift portfolio assets from one industry sector to another in an attempt to outperform the market. Sector rotation, at its heart, is about gauging market and business cycles. A new bull or bear market often turns out to be a prelude to an economic recovery or downturn. Keep in mind; the lag time may be several months before you see a clear trend developing.
An essential assumption in sector rotation is that the economy is either improving or faltering to some degree. So there are three steps that an investor must take:
- Identify the business cycles that commonly correspond to these market cycles
- Shift assets to the particular industry groups that do well in these business cycles
- Shift assets out of particular industry groups that do not do well in these business cycles
When you have a full-blown recession, certain types of businesses do better; when the economy is booming, certain types of companies excel. Tactical asset management recognizes these opportunities exist and utilizes sector rotation strategies for an investor’s potential advantage.
When looking at sector rotation, I look for the top 1/4 (25%) of the stock universe (companies in sectors that fall in the top 25% of all sectors). These are the top sectors stack ranked against one another. I take the major sectors like health care and break it down further by categories like pharmaceuticals, biotechnology, health care providers, and hospitals (to name a few).
In using this screen process for our Faith-Based 100 Index, our top 100 stocks. As of 1-14-15, this produces 34 companies:
|Casey’s General Stores, Inc.||CASY||1%|
|Skyworks Solutions Inc.||SWKS||1%|
|O’Reilly Automotive, Inc.||ORLY||4%|
|Old Dominion Freight||ODFL||10%|
|Genuine Parts Co.||GPC||11%|
|Panera Bread Co.||PNRA||12%|
|Jack In The Box, Inc.||JACK||13%|
|Realty Income Corp.||O||17%|
|Costco Wholesale Corp.||COST||22%|
|Health Care REIT, Inc.||HCN||22%|
|Dollar Tree, Inc.||DLTR||23%|
|Extra Space Storage Inc.||EXR||23%|
|National Health Investors||NHI||23%|
|Omega Healthcare Invs, Inc.||OHI||23%|
|Acuity Brands, Inc.||AYI||24%|
|Cedar Fair L P||FUN||24%|
|HCA Holdings Inc.||HCA||24%|
From here, I want to further narrow our list. To do so, I utilize a concept called “relative strength”.
Relative strength is a simple performance metric. It helps us figure out: How well a stock performed compared to the S&P 500 and how it performed relative to other stocks in its industry group. The difference in price performance indicates a company’s relative strength.
The idea is to find companies that are stronger than:
- The market or
- Companies the strongest within a particular sector.
- A corresponding objective is to dump stocks that are relatively weak.
How does this work:
- After a big selloff, the stocks and sectors that have remained up (i.e., the ones with relative strength) may be the ones that will make pronounced gains when the market recovers. Their strength has been tested and validated in the market swoon.
- When Wall Street rallies you examine the sectors and stocks that have lost ground. These weak stocks and sectors may be targets for shorting.
In using relative strength I look for companies who score 75% or better than their peers. So if I take my list of 34 companies from above, the following 23 companies make it through my Relative Strength Screen:
|SWKS||Skyworks Solutions Inc.||98.6|
|HCN||Health Care REIT, Inc.||97.2|
|AYI||Acuity Brands, Inc.||97|
|JACK||Jack In The Box, Inc.||95|
|EXR||Extra Space Storage||93.5|
|OHI||Omega Healthcare Inv.||91.3|
|CASY||Casey’s General Stores||90.7|
|O||Realty Income Corp.||89.2|
|DLTR||Dollar Tree, Inc.||86.6|
|PNRA||Panera Bread Co.||83.7|
|COST||Costco Wholesale Corp.||80.3|
|HCA||HCA Holdings Inc.||78.5|
|FUN||Cedar Fair L P||78.3|
We all want better returns right? How can we get them?
Real estate investing is about location, while stock investing is about getting a good price. That search leads more than a few investors to find attractive companies at a fair price. I use the PEG ratio, to separate the wheat from the chafe. The price/earnings to growth ratio (PEG ratio) is simply a given stock’s price/earnings ratio (P/E ratio) divided by its percentage growth rate. I generally look for stocks that are under 2. When applying this to our list, we narrow the list down further to just 12 companies:
|Company Name||Ticker||PEG Ratio|
|Skyworks Solutions Inc.||SWKS||0.93|
|HCA Holdings Inc.||HCA||1.15|
|Dollar Tree, Inc.||DLTR||1.38|
|Panera Bread Co.||PNRA||1.75|
|Acuity Brands, Inc.||AYI||1.88|
|Jack In The Box, Inc.||JACK||1.92|
So now we have a manageable list of stocks in top sectors of the economy, that have strong relative strength scores, and are reasonably priced.
In our current screen, we see:
- O’Reilly Automotive, Inc., (ORLY), a specialty retailer of automotive aftermarket parts, tools, supplies, equipment, and accessories in the United States.
- Jack in the Box (JACK) is a quick-service hamburger restaurant chain.
- Dollar Tree, Inc. (DLTR), which operates discount variety stores in the United States and Canada.
- Blackhawk Network Holdings, Inc. (HAWK), a provider of prepaid and financial payments products for consumers and businesses.
- HCA Holdings, Inc., (HCA) provides health care services in the United States.
- Acuity Brands, Inc. (AYI) engages in the design, production, and distribution of lighting solutions and services in North America and internationally.
- Skyworks Solutions, Inc. (SWKS) is the industry’s leading wireless semiconductor company focused on radio frequency (RF) and complete semiconductor system solutions for mobile communications applications.
- Panera Bread Company (PNRA), which operates a retail bakery-cafe business.
- Williams-Sonoma, Inc. (WSM) is specialty retailer of products for the home.
- Zebra Technologies Corporation (ZBRA), which designs, manufactures and supports a broad range of direct thermal and thermal transfer bar code label printers, receipt printers, instant-issuance plastic card printers and secure identification printing systems, related accessories, and support software.
- Tessera Technologies (TSRA) develops semiconductor packaging technology that meets the demand for miniaturization and increased performance of electronic products.
- Cintas Corp. (CTAS) provides a specialized service to businesses of all types – from small service and manufacturing companies to major corporations.
Bottom Line: A tactical asset management strategy may help you to mitigate market losses and realize better returns. This dynamic, responsive approach keeps macro factors in mind and makes a lot of sense today as the “buy and hold” approach seems ill-suited to these times. If you want to improve portfolio performance, tactical asset management may be the way to go about it.
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