When markets are choppy, investors should choose cash over the staid concept of buy-and-hold, according to Donald Schreiber, co-portfolio manager and chief executive of Wealth Builders Inc., which has $625 million under management.
“The idea of buy-and-hold, regardless of market cycles, is the most ridiculous thing I've ever heard,” he said. “We know when markets go down, investors will often panic and sell at a loss, so we know buy-and-hold doesn't work — and that's why we should stop telling people to do it.”
The WBI Absolute Return Balanced Fund (WBADX), which Mr. Schreiber helps manage, currently has a 25% allocation to cash, reflecting the rising risk in the fixed-income market.
The fund, which was launched in December to give retail investors access to a strategy that has been managed as a separate account for 19 years, has the flexibility to hold 100% cash.
“We're more than happy to hold cash if we need to,” Mr. Schreiber said.
The portfolio, which is designed for a target balance of 50% stocks and 50% bonds, is currently playing defense against the looming threat of inflation and rising interest rates.
On the equity side, there is a 54% allocation to dividend-paying stocks.
But the fixed-income component of the strategy has been trimmed to just 21% of the portfolio, and durations have been shortened to protect the fund from being caught flat-footed if the bond market starts to adjust to inflation.
“You want dynamic risk management, both on the bond and the equity side of a portfolio,” he said.
While Mr. Schreiber has trimmed the bond exposure, he continues to enjoy solid income from corporate dividend payouts, which have been rising over the past decade at more than double the rate of inflation.
Over 10 years through the end of 2010, the average annualized dividend payout of the 30 companies making up the Dow Jones Industrial Average grew by 6%.
Inflation over the same period, as measured by the consumer price index, grew by 2.4% annually.
“The rate of increase [in dividend payouts] is really exciting, because investors are looking for ways to keep pace with inflation,” he said. “You can't keep pace with inflation by just holding bonds.”
In managing the equity portion of the fund, Mr. Schreiber applies a quantitative value bias that concentrates on income statements, balance sheets and overall growth trends.
Ideally, any stock added to the portfolio should have a dividend yield of at least 50 basis points more than that of the S&P 500 Index, which is currently yielding 1.8%.
The total income component of the fund, which includes stock dividends and interest from bonds, averages around 4% annually.
Even though Mr. Schreiber is currently less bullish on bonds, he will remain nimble on the category by shortening or extending the duration of the individual bonds in the fund as the market environment evolves.
“This is a strategy designed for conservative investors,” he said. “The goal is to capture the up market returns when the price trends are positive, but when the price trends turn negative, we shift from return mode to capital protection mode.”
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