The Investment Scientist

Archive for July 2011

Today, I received an economic commentary from WisdomTree that includes a piece written by Professor Jeremy Siegel. He is a University of Pennsylvania professor and author of several books totting stocks as long-term investments. His piece covers four subjects: economic slowdown, US default, European debt crisis, and corporate earnings. Below, I have excerpted key passages for readers.

On economic slowdown

“Estimate of GDP growth in the second and third quarters have been marked down significantly over the past three months, mainly the result of lackluster consumer demand …US consumer sentiment has plummeted. Much of that is due to the continued stalemate on the budget deficit and politicians talking about curtailing Social Security and Medicare benefits.”

On US default

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I asked my PhD analyst John Want to pull the Harvard Endowment 13F filing for the first quarter of 2011 and find out what has changed sinceour last examination three months ago. From the table of the top 15 holdings that is attached, we can see three changes:

1. The iShare S&P 500 Index ETF is no longer among the top 15 holdings. Though there are still a number of individual U.S. stocks among the top 15, their relative weights have decreased. Does that signify Harvard is a tad less bullish on U.S. equities over all?

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MZ Capital 40/60 Portfolio Model

This report shows the construct and performance of a 40/60 model portfolio.

Asset Classes and Fund Selection

There are six asset classes in this portfolio model. The asset allocation is implemented using DFA funds, as shown in the table 1. I explained why DFA funds are better than Vanguard funds here. 

Table 1: Asset Class Funds
Asset Class Percentage Funds
US Equity 10% DFFVX – US Targeted Value Fund
International Equity 10% DISVX – International Small Cap Value Fund
Emerging Markets 10% DFEVX – Emerging Market Value Fund
REIT 10% DFREX – Real Estate Securities Fund
TIPS 20% DIPSX – Inflation-Protected Securities Fund
Treasuries 20% DFIHX – Short-Term Treasuries Fund
Muni Bonds 20% DFSMX – Short-Term Muni-Bond Fund

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On July 8, Morgan Stanley downgraded Google. Their reasons?

Given Google’s aggressive hiring plans, rising compensation costs and heavy advertising spending on Chrome and other products, the company’s EBITDA margins will decline this year and next year.

Morgan Stanley said Google is on pace to add 7,000 new staffers this year, well above the previous estimate of 4,000 new hires.

Investors, presumably including many of Morgan Stanley’s own wealth management clients, promptly sold off GOOG, causing its stock to tumble 3% that day.

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If the recent headlines make you feel like the international financial order is heading toward a cliff, I would not blame you. Apparently, the Europeans have managed to spread their sovereign debt crisis from Greece to Italy, a far more significant country for the world economy. Here in the US, politicians are engaged in high-stakes political brinksmanship regarding raising the debt ceiling, without which the US will go into default for the first time in its history.

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Recently, I came across a 20 Year Periodic Return Table prepared by Black Rock. I want to share this with you since this table illustrates the investment principles I have been emphasizing: 1) asset class diversification; 2) disciplined rebalancing; and 3) small value tilt. Today’s focus is on 1); the other two points will be discussed in future articles.

20 Year Asset Class Returns

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Author

Michael Zhuang is principal of MZ Capital, a fee-only independent advisory firm based in Washington, DC. He is also a regular contributor to Morningstar Advisor and Physicians Practice. To explore a long-term wealth advisory relationship, schedule a discovery meeting (phone call) with him.



You may also get his monthly newsletter, or join his Facebook page for regular wealth management insights. Michael's email is info[at]mzcap.com.

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