Damian Gallina, CFA
By now you’ve heard us explain the key tenets of Buttonwood’s investment policy, which is meant for tough times as well as boom times. In this article, we want to share some of the actions we’ve been taking consistent with our written approach to investing. You’ve probably noticed a whirlwind of portfolio activity. Here is the reasoning behind much of that…
Compelling Businesses at Lower Prices – When buyers go on strike and prices fall across the board, companies that usually trade at a premium, become attractive. We viewed the recent decline as an opportunity to pick up some long favored companies that we haven’t purchased in years as the last bull market lifted many of those excellent businesses to prices more expensive than we could stomach for new shareholders. This was a chance to get these companies for anyone who didn’t already own them. We also picked up some new companies that few or no clients held before.
Rebalancing – Asset allocation works as long as each asset category included in your portfolio achieves a good result in the long term, and as long as they take different paths to get there. The opportunity to pick up extra return comes from rebalancing. When performance diverges sharply, the weightings within your portfolio will also diverge from the intended allocation. It can take courage, but the right thing to do is to trim from the categories that held up better and add to the categories that fell faster or deeper. Consider the results of the following broad indexes in 2020…
A portfolio that began the year diversified among several different asset classes fell to a slightly different mixture by March 18th. Making a few tweaks to rebalance back to the original mix forces the discipline to sell high (or at least less low), to buy lower. In this example, about a 4% of the original portfolio or 5.2% after the fall would have been reshuffled… a small shift, but a sensible one.
Reduce Cost for Smaller Companies – In the smaller company part of your portfolios, we embrace research that identifies the largest small companies, mid caps, as the source of much of the excess return from smaller companies over time. The fund we had previously used, iShares S&P Mid Cap 400 Value (IJJ), was fairly inexpensive (0.25%). However, a newer option that invests similarly, Fidelity Mid Cap Value Index (FIMVX), recently came available at an even lower price (0.05%).
The drop in market price made it easier to shuffle from one mid cap fund to another without much of a tax burden. We opted to make this switch while rebalancing your portfolios, and included a second fund in the purchases, Fidelity Mid Cap Index (FSMDX), which costs even less (0.025%).
When a Closed Fund Reopens – International is a category in which clever active management can capitalize on opacity. Information is simply less widely available for investors to evaluate foreign businesses, which opens opportunity for managers who can dig a bit deeper. In this category, we prefer to use mutual funds to gain the benefit of that deeper research. We’ve long admired, but haven’t been able to purchase one of our favorites, Artisan International Value Advisor Class (APDKX)… until now.
The fund closed to new investors back in 2011, a responsible move we respect. Otherwise, it simply dilutes current shareholders if a fund takes in money the manager has a tough time deploying while staying true to their discipline. Artisan has just 15 funds, seven of which have been closed in the past. That’s a sign of a client friendly culture… particularly when you consider that funds collect more fees when they manage more assets. We can understand why portfolio manager, David Samra, would open the fund when international stocks have been particularly hard hit, and we jumped at the opportunity to switch to this fund while also rebalancing to International.
With our focus on your financial health, Jeff and I have been methodically executing on each of these strategies over the last several weeks. We have more planned, after prioritizing these which we believe can do the most good. Things have been moving quickly, but we wanted to take a moment to keep you up to date on our thoughts. As things settle down, we can take more time to explain each of these actions in more detail. Until then, thank you for your trust and confidence.