Maintaining Balance In Times Of Uncertainty
April 18, 2008

SAN DIEGO (ETFguide.com) - ETFs have become the investment vehicle of choice for individual investors and investment advisors alike.

Joining us today is Cesar G. Manent, Partner and Co-Founder of 5th Street Advisors, LLC.
We'll talk about the "kid in the candy store" effect, actively managed ETFs and balanced asset allocation.

Cesar, Your firm utilizes predominantly ETFs as part of your asset allocation models. Explain why?

CM: The primary reason is that with ETF’s we know exactly what we own, therefore we can construct a portfolio exactly to our specifications. The unsystematic risk inherent in equities is a burden we are unwilling to bear. Mutual Funds turn over their portfolios so you don’t really know what they own until they report. Anyhow most don’t beat their benchmark, so what is the point of paying the higher fees? Bottom line is that we need to be able to look the client in the eye and say “you own this and that and here’s why.”

The second reason is cost.

The third reason is the ease of getting in an out during the trading day.

And the fourth reason is that we don’t get any tax surprises at the end of the year!

With over 700 ETFs one could feel like a “kid in the candy store”. What criteria matter most to you when selecting ETFs?

CM: After we have identified the asset class and the portfolio weights, we look for the index that will best reflect our investment idea. We then search for the least expensive instrument that will give us the desired exposure (and if the daily liquidity is there we go with it). Liquidity is important becausewe want to make sure that our fills are good on the buy and particularly the sale.

What do you think about actively managed ETFs? Pros & Cons.

CM: We haven’t really researched them. Having said that, if we see that they are demonstrating value we will add them to our asset mix. For now, we think passive ETF’s are great; so we’ll wait and see how the active ETF’s evolve and perform. We are in the show me stage!

Without going to much into detail, what basic asset allocation would you recommend for a balanced portfolio in today’s market environment?

CM: Our style could be best described as a “Balanced World Allocation Style.” Global economics today are so intertwined that to be truly “balanced” you need to be in multiple asset classes worldwide not just the US. At this time all of our asset classes are fairly evenly split between the US and international.

Our current US equity exposure has been biased to mega large cap, and the international equity piece has a pronounced Asian and emerging markets tilt at the expense of Europe. Our commodity exposure is evenly spread among metals, agriculture and energy, and the REITS component encompasses both US and international. The portfolio also has room for a small allocation to opportunistic ideas, and to that end we have exposure to three sectors that are currently severely beaten down.

We also have an overweight in US Money Market and in the US fixed income while traditionally we have exposure to investment grade bonds, inflation protected and high yield. We recently sold the investment grade and inflation protected bonds. We are now looking into other areas of the US fixed income market that are less expensive. International fixed income contains investment grade and high yield and it is the only asset class where we use Mutual Funds.

2008 has been a tough year for investors so far. What approach do you take to reduce volatility in your client’s portfolio?

CM: As you can see from the portfolio above we are highly diversified, but recently, the only true correlation diversifiers have been the commodities and the fixed income components, specially the international fixed income piece.

Going forward, where do you see the best investment opportunities and where are you staying away from?

CM: “Staying away from is a little strong” but on the equity side we have reduced our weights to European equities, and we will be looking for entry points into US mid and small cap exposure. We are maintaining our weight in commodities, but like most people we are wary, so any time they supersede the allocated weight we rebalance.

On the fixed income front we are comfortable having a large money market exposure, and we have sold the inflation protected and investment grade bonds. We are looking at less expensive areas of the market such as floating rate bonds. With the dollar being so weak the international fixed income has done great of course but like commodities we keep an eye on that one too! 

Thanks Cesar.

ETFguide does not endorse Cesar Mananet or 5th Street Advisors, LLC. ETFguide is not affiliated with Cesar Manent or 5th Street Advisors.

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