Sector Allocation – 2017

On a regular basis, articles are written regarding Sector Allocation. In a nutshell, this refers to the allocation of a portfolio across various business lines (industry sectors). There are several methodologies in use, but most use a risk tolerance/individual preference/age matrix to identify an investing strategy tailored to ones’ circumstance.

Last week I shared my International Allocation to close 2017, this week my focus will be how I allocated the portfolio between sectors.  This is a composite view as I don’t currently differentiate between US and international companies.  Also, my approach to investing likely differs from most in that I attempt to identify trends or situations that may prove to be profitable. Then I’ll run with the idea until the broader market adjusts its’ pricing. An example of this is Financials which represented 16.6% of my portfolio in 2015 on the assumption that it was ripe for consolidation. I added further in 2016 on the premise of rising interest rates. The market caught up with – and exceeded – my expectations with the election and hope for 2017 regulatory reform. I’m not much of a buyer now in this sector as frankly there remains little upside potential and I consider myself overweight.   I continue to hold with the expectation of rising dividends through the stress tests, CCAR cycle and further interest rate increases.

The downside of investing based on a thesis is – unless diligent – the portfolio can quickly get out of balance.  The upside is that if correct, you tend to beat the market.  One could say it’s timing based on external events.  So let’s first check my themes:


Small Banks 15 May 2014 76.1% 56.0%
Transaction Processor 29 May 2014 39.4% * 54.4%
Smaller banks 2 Sep 2014  60.6%  47.1%
Consumer focus 6 Jan 2015  72.2%  44.0%
USD weakness 25 Mar 2015  24.3% *  38.9%
Underlying Primerica assets 24 Dec 2015  22.2% *  38.4%
Coke bottlers 31 Oct 2016  19.7%  32.0%
Blockchain/China controls 14 Dec 2017   5.2%   3.0%
* indicates mergers or spins which distort reported returns.  Of these, only Primerica lagged the S&P.  The other laggard I suspect will be a beneficiary of the tax plan.

The ‘meat and potatoes’ of the portfolio resides in the ‘Anchor’ holdings which are targeted at 18% in total.  These three issues have lagged the target for a couple of years (and are currently about 13.5%) hence my renewed effort to increase my KMB, CLX and WEC holdings this year.

Two other components factor into my 2018 thought process – free trades.  In prior years, I performed a handful of trades in my brokerage account sometimes in 10 share increments, but more often in 25 or 100 share lots.  This was done to reduce the percentage paid in fees to a nominal amount.  My broker has placed 20 free trades in my account while Motif has implemented a no-fee option which I tested on Friday morning.  While these no-fee trades exist I will probably execute more – but smaller – transactions, essentially filling in some gaps in my smaller holdings.   This may also result in the sector allocation for 2018 seeing minimal improvement.

With the caveats out of the way, let’s take a look at my end of year sector allocations:

SECTOR YE 2017 YE 2016
Discretionary 24.36% 25.43% will be reduced to 11.47% with 2018 sector changes
Energy 6.46% 6.20%
Financial 32.18% 29.29% some of the increase could be considered Technology
Health Care 2.54% 3.72%
Industrials 5.27% 5.11%
Materials 0.68% 0.79%
REIT 1.88% 2.06%
Staples 12.34% 12.93%
Technology 7.19% 6.44%
Telecommunications 1.36% 1.55% will be increased to 14.25% with 2018 sector changes (Communications Services)
Utility 5.75% 6.5%
Sector changes on schedule for September 2018

Basically little change from last year – a little heavier in financials. I’m hoping my purchase strategy reduces this to some degree, but I’m willing to wait a little further into the rate hike cycle before getting overly concerned.  But it’s a little like herding cats – you get most of them heading one direction and invariably a couple dart another direction.

As I’m finished with my analyses for 2017, next week regular programming returns.


Volatility Returns!

With the wild ride in the markets this week, I perused some of the community’s blogs to gauge the reaction.  While not meeting scientific norms regarding sample size, I was surprised by the lack of reference to the pullback in 66% of them – including ones with posts as recent as yesterday.  Perhaps it’s a lack of funds to take advantage or the deer in the headlights syndrome.  One blog, Fully Franked Finance, had a timely piece a few days prior which stated the importance of a ‘shopping list’ – as many others also encourage.  I too, engage in a strategy which emulates  the ‘shopping list’ strategy.  So, what were my moves so far this month?

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Generally I refrain from back-to-back posts with similar topics but decided to make an exception this week as the moving parts have kicked into high gear.  My post last week addressed my uneasiness with cryptocurrency as well as my interest in the underlying blockchain technology.  It appears that my view has some support as two blockchain ETFs debuted on January 17th (BLOK and BLCN) and one January 25th (LEGR).  This should be followed by KOIN next week.  Horizons and Harvest (HBLK) also have ETF applications pending.  Grenadier penned a piece on Seeking Alpha that did some analysis on the first two.  Four of LEGR’s top five holdings are included in either one or both of the originals so it will probably be similar.  David Snowball highlights this sentiment in his piece There’s no idea so dumb that it won’t attract a dozen ETFs stating, “…there are no publicly traded companies that specialize in blockchain; there are mostly companies with a dozen other lines of business that have some sort of efforts going into blockchain.”  This is 100% correct.

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Ringing In The New Year

As I wait for the last three dividends of 2017 to post to my account, my final accounting report will delayed into next week.  Sure I could just accrue said dividends and release the report but where would the fun in that be?  Especially since I can lay claim to being the first official victim of the new tax plan, aka the Tax Cuts and Jobs Act of 2017.  As it’s not even effective yet, I guess this is the first – of probably many – unintended consequences to emanate from this bill.  This week I’ll also cover my last minute 2017 moves and my first 2018 activity.  But first …

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Sluice Box: My 2018 Strategy

In a recent conversation with a friend of mine, the topic of cryptocurrency arose as he has started accepting Bitcoin in his business.  Though more enamored over the possibilities of wealth through hoarding and/or trading, he began to look under the hood to figure out why I had a greater fondness for Blockchain over any cryptocurrency.  His insight surprised me: “You’re like the sluice box salesman in the California Gold Rush.”

I choose to think of myself as a shortstop hitting singles rather than a home run hitter going for the fence, but his analogy was apt.  I prefer to get a slice of many transactions as opposed to getting the big one.  I play the percentages.   He was able to visualize I place a greater value on the tools (mining), transport (exchanges) and utility (ancillary applications) rather than the commodity itself.  Meaning, I’d rather sell the Levi’s than look for (and mine) the gold vein.

It appears the revisions to the tax plan being discussed will be slightly less draconian than previously announced resulting in a little lead time for portfolio adjustments.  My guess (pure speculation) is the first half of 2018 will be relatively good but a little choppy.  The last half I suspect we’ll be seeing a weaker dollar, a little uptick in inflation and minimal tangible results from the administration’s policies.  Anyway, an emphasis on appreciation over dividends in a rising tax environment may result in tax deferral possibilities.  This belief is the basis for next years’ strategy as subsequently outlined.

  1. Continuation of the primary portfolio strategy in regards to moving closer to the defined target allocations.  One example of this was my first December purchase, KMB which is an Anchor holding of mine.
  2. With the tax bill still in an uncertain status, load the maximum allowable contribution to the IRA.  These funds have been allocated and will be moved by month end.  A small Canadian holding in my taxable account has been identified as my new IRA purchase which will probably be made in January (pre ex-div).  A by-product of this will be a temporary overweight status in this issue.  Since I don’t like redundant holdings across accounts, my smaller taxable holding will be sold post ex-div.  This should shield more income from taxation (under current tax).
  3. Implemented (December 14th) my side strategy for 2018 titled Sluice Box which is a reference to the Gold Rush days.  This represents about 1% of the portfolio and was created (and bought) in my Motif account (shameless plug).  The emphasis is on Bitcoin, Blockchain, Growth and my first Swiss stocks with a couple of beaten down issues thrown in.

My 2018 strategy research began in earnest when I encountered Fortune magazines’ November 1st article, In Search Of ‘Vital’ Companies.  Of the fifty companies listed, my selection process drilled into the dividend payers – albeit at low yields.  Then on November 7th, Investor Place published The 10 Best Growth Stocks You Can Buy Now I chose to ignore The Dividend Guy’s August 23rd launch of Dividend Growth Rocks as I tend to shy away from paid sites particularly when operated by one person with multiple pseudonyms.  Besides, only one of his selections (Nordson – NDSN) was either not owned already or replicated in the other analyses.

Once the data was combined, I removed issues already owned and ones I had no inclination to buy.  Basically I had to be convinced of the opportunity and that the price (subjective argument) remained reasonable.

The following table presents my 2018 picks and the primary reason.  All but one are dividend payers and I front-loaded my purchase to 2017 to ensure receipt of CME’s special dividend (ex-div Dec 28).

SLUICE BOX (Motif: 2018 Growth)
NVIDIA Corporation (1,2) NVDA 7.30% 0.32% Bitcoin chipset
CME Group Inc CME 7.30% 1.76% Bitcoin Futures
Cboe Global Markets Inc CBOE 6.70% 0.86% Bitcoin Futures
Intercontinental Ex. (1) ICE 6.80% 1.14% Coinbase investor
Nasdaq Inc NDAQ 6.70% 1.96% Blockchain
Microsoft Corp. (2) MSFT 6.80% 1.98% Blockchain (Azure, Ethereum)
JPMorgan Chase & Co. (2) JPM 6.80% 2.68% Blockchain (hyper ledger)
Veritex Holdings Inc VBTX 5.90% 0.00% emerging growth co. (JOBS Act)
Ottawa Bancorp, Inc. OTTW 6.10% 1.10% 2-step conversion (growth)
Newell Brands Inc NWL 6.50% 3.02% Brands
Energizer Holdings Inc ENR 6.50% 2.44% Brands
Cognizant Technology (1) CTSH 6.50% 0.84% Future 50
Intuit Inc. (1) INTU 6.70% 1.00% Future 50
Novartis AG (ADR) NVS 6.70% 3.21% possible Alcon spin
ABB Ltd (ADR) ABB 6.70% 2.91% purchased a GE segment


  1. Future 50 (also currently own: MA, V)
  2. Investor Place 10 (also currently own: V, SQ)
  3. Other Bitcoin/Blockchain indirect investments include: GS, IBM, WU, AMTD

At the very least it will be interesting to observe the Crypto phenomenon in more of a supporting role.  I also need to acknowledge Dividend Diplomats whose research on NWL was enlightening.

Tax Plans – Part 2

Much has transpired over the past week in regards to tax reform.  With the Alabama Senatorial special election now being too close to call, Congress is kicking into high gear to try to get it passed while the Republicans hold a slim majority in the Senate.  This past week saw the House passing their version with no debate although appearances were that many were unaware of the full impact.  Case in point is the CNBC interview with Diane Black (R-TN) where she had the wrong definition of carried interest (she thought it was applicable to car dealers not hedge funds).

If it passes the Senate in something close to its current form, the result will be a reduction in the number of people qualifying for tax deduction itemization from the current 29% to an estimated 6%.  This is the “gotcha” for many filers including myself.  The proposed increase in the standard deduction is large enough to wipe out itemization yet too small to prevent an overall tax increase.  The only viable course of action (for me) is to front load deductions into the current tax year and hope it is not a retroactive change.  I’ve eliminated one alternative from consideration (establishing a corporation) as it would only be a wash in my current bracket and would choose accelerate my 2018 income up to the 25% tax level while reducing subsequent years to fall below the 0% rate.

This plan also has some potential ‘unintended consequences’ which may impact both Trump’s agenda as well as 2018 (and beyond) investment strategies.  Last week I identified home builders as a potential casualty, this week I’ll present a few more that I’m looking at .

Chained CPI

This will impact retirees first and wage earners later.  Essentially this modifies cost of living increases to a lesser increase than regular CPI.  Social Security and Veterans benefits will have lower increases than before reducing disposable income.  Wage earners will see tax brackets expand more slowly potentially (eventually) putting them in a higher bracket faster than the current structure.  End result is (my opinion) a positive for Staples and Utilities with Discretionary taking it on the chin.

Municipal Bonds

The plan would eliminate – or curtail – issuance of private activity bonds (hospitals, nonprofit colleges and universities, and airports) or Municipal Bonds for stadiums.  These types of bonds are often used for rehabilitating cities – think infrastructure.  If one tool is eliminated what is the chance of Trump’s Public/Private partnerships getting off the ground?  I see this as a negative for some Industrials.

General Electric

In the midst of GE’s dividend cut and restructuring I had to hit the pause button.  Their game plan going forward is to focus on three segments; Aviation, Healthcare and Power.  All fine and well – at least it’s a plan.  The remaining business lines will be sold or spun off – which is why I remain interested (although prior spins haven’t been shareholder friendly).  Now the tax plan injects an additional wildcard.  The Power division is the most troubled.  The Renewable Energy segment may be a spin candidate especially as the tax plan targets the Wind Energy production tax creditRetroactively.  Talk about throwing a monkey wrench into the thought process.

With all the unknowns, I believe my 2018 strategy will be to prioritize growth over yield.  The rationale being to delay taxable events as much as possible.  Next year is certainly on tap to be full of uncertainty and  surprises.

Are you considering alterations to your strategy?


My Overseas Guidebook

Over the past few months I’ve visited several blogs when one topic in particular has been addressed. For the past year or two I’ve been expanding my international holdings to my current mix which is highlighted below. Time In The Market got me thinking with his comment.  Although he tends to be more an ETF investor, he was experiencing similar trends as I.  Then there was Bert’s CM purchase.  He was agnostic to the CAD/USD correlation probably because the US and Canadian markets are usually tightly correlated with exchange rates.  Then there was Tawcan, illustrating his top five.  In his post he mentioned his use of ETFs for international diversification.  Finally there was The Dividend Pig musing on portfolio hedging.

My endeavors in overseas investing have delivered an education of some obscure items that hopefully will benefit an investor looking out of country.

Create a Strategy

Before starting, perform your due diligence and run an issue through your screening algorithm.  Then ask the question, “Is my home currency overvalued?”.  In the case of US investors, the simpler question is “Do you believe Trump’s policies will result in a stronger or weaker dollar?” and secondarily, “To what degree?”.  I like to use foreign exchange as a tailwind.  But by investing in dividend stocks in the event I’m wrong the sting is mitigated.

Be Aware of Monthly Deviations

Currency fluctuation will result in either positive or negative moves in both portfolio value and dividend amounts.  As an example January to August 2017 saw the US dollar depreciating against most currencies.  One example is the Euro which has appreciated 8.95% since last October – making US exports cheaper and imports more expensive.  One anomaly with the currencies I track – the relative value has been stable when compared to each other whereas the US dollar has been the outlier.  Also many companies pay annual dividends or interim/final (with variable amounts) dividends.  Some are capped at a percentage of profits.

Be Wary of Tweetstorms

In recent months, fluctuations have occurred as the result of Presidential tweets.  Most recently was the posturing on NAFTA.  This was a buying opportunity for Canadian and Mexican issues.  Conversely, dividends received took a hit.

Understand the Tax Implications

The US engages in tax treaties on a country by country basis which establishes the withholding rate and the application of said rate.  Ones that I’ve found with caveats include Canada (15% unless in an IRA and a part of DRS – then no withholding), Australia 15% (unless reduced via franking), Singapore – verify on a company basis whether dividends are qualified (may impact the decision to place in a taxable or tax-deferred account) and Switzerland (15% if registered, 25% if not – check your broker).  The good news is that at tax time foreign withholding can be credited (with some limits) under current law.

Stay Abreast of Local Events

This can be issues not normally aired in the US such as the Australian deflation discussion (generally groceries) or the Customs workers strike in Chile.  These wildcard issues have the ability to impact the profitability of the investment.

The lessons I’ve learned have been many and these are but a few.  However, foreign investing can be rewarding as long as there is an awareness.