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Constructing a Portfolio from the Top Down

by: Roger Nusbaum June 09, 2008 | about stocks: FXI / GCC / GXC / PHO / UCI    

Roger Nusbaum

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Maybe I am the last to know about this fund, but I read about the DWS Scudder Global Thematic Fund in the Wall Street Journal the other day. It has a bunch of different ticker symbols but you should be able to find info with SCOBX.

The idea behind the construction of the fund is to build a diversified portfolio in such a way as to allocate by theme instead of sector.

  • Talent & Ingenuity (companies that thrive on intellectual property and talent) 18.52%
  • Global Agribusiness (you know what this one is) 16.12%
  • Disequalibria (industries where circumstances force change and innovation) 15.97%
  • Supply Chain Dominance (companies that can squeeze suppliers) 9.46%
  • Large Units (companies that benefit from global growth in consumerism) 8.36%
  • New Annuities (companies whose businesses create an annuity-like stream) 7.32%
  • Private/Public Partnerships (by way of example, Deutsche Post and an airport) 4.81%
  • Security (more than just defense contractors) 4.56%
  • Asymmetric Negotiators (companies that can conduct one-sided negotiations) 3.42%
  • Market Hedge (they use mining stocks here) 3.05%
  • Ex-Atrophy (companies leading Japan out of its long-time stagnation) 2.89%
  • Distressed Companies (you know this one too) 2.84%

In reading the list of themes I wouldn't have known what even half of them meant. This article from Morningstar gives a little more color on some of the themes. According to the WSJ piece, the fund is out of global agribusiness as the managers perceive a supply glut coming.

I should add that the fund gets five stars from Morningstar. Over the last seven years it beat MSCI EAFE Index (not sure if that is the fund's benchmark but that is the index M-star uses to compare) three times, lagged it four times and YTD is ahead. I'm not sure what makes it a five star fund, not a shot, I really don't know.

I'm not really interested in the fund or the themes they chose, but the idea of constructing a portfolio from the top down via themes important to you is an interesting concept. For discussion's sake what themes would be important to you and how could you access those themes?

Here are some that I think are important and, more importantly, will continue to be important for a while to come;

  • Water (can be accessed with ETFs or stocks but the precision of certain stocks might be better)
  • Infrastructure (current ETFs are fairly blunt but have some purpose, stocks again can be more precise; engineers, toll roads and so on)
  • China (to use ETFs is to be comfortable with heavy financial exposure with two of them or some solar with the other)
  • Frontier Ascendancy (here ETFs, when they come, should capture this theme very well)
  • Inflation (commodities, which can cover a lot of ground with different sorts of products, and TIPS would seem like a simple way to go
  • Increasing Resource Demand (obviously overlaps with inflation above)
  • Surplus Countries (the idea here being countries at the opposite end of various spectrums from the US)

These are just examples; you may have other ideas.

I think a diversified portfolio could be constructed around these themes (or any of your own) to take in different sectors, cap-sizes, countries, volatilities and the like, but it would take a lot of work. Despite the thesis put forth by SCOBX's manager that this sort of construction can deliver diversification, it would seem very easy to end up with lopsided bets.

The theory behind the fund is unlikely to cause anyone to redo the way they do things, but it stretches the thought process a bit which is always constructive.

I've been writing about investing in themes for as long as I've been writing so I am a believer but I add it in differently. As a function of what I read and otherwise observe, certain themes resonate and then I try to figure out how to work them into the portfolio.

As an example, when I had exposure to China before, I felt that the best way in was with the oil companies. China's usage is obviously increasing and this helped all the Chinese oils. The next time I go back into China it will be another way, as I no longer think the oils are the best way in.

So when I had Sinopec (SNP), it was part of the allocation to energy. If I were to go back in with a bank (this is an example only, I'm not sure how I will go back in but it won't be with a bank) then it would obviously be part of the allocation to financials.

That explanation is probably obvious, but in case it isn't...

After the action on Thursday and Friday we may all need one of these little tiny cars.

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This article has 13 comments:

  •  
    Jun 09 10:09 AM
    What you've hit on is the beauty of etf's. Aside from tailoring your own portfolio, etf's allow you to test the waters without committing a lot of money up front. And they trade like a stock, not a mutual fund.
    Reply
  •  
    Jun 09 10:11 AM
    I wonder what this clown is paying the site to feature his fluff. There are endless ways to slice and dice the market portfolio. One way to invest is to choose the market portfolio as per mpt. This investment approach has theoretical and empirical support.

    Investing in sectors that may be important in the future can pay off in certain instances and ruin you in others. Take the internet for instance. Some made money in the run-up in the 90s and others lost money in the subsequent crash. Real estate is the more recent example. These were important themes in the economy, but were they sound investment strategies?

    So what is the evidence that this "theme" approach is preferable to other investment approaches?

    This guy doesn't deal in evidence or investment merit. He deals in coming up with yet another tired, repackaged bag of goods to sell to the public.

    I wish that this site would use some judgement in choosing its featured articles.
    Reply
  •  
    Jun 09 10:27 AM
    How about a McCain Fund, or an Obama Fund, each one investing in companies which are expected to perform, in their respective environments? (The McCain Fund invests in defense stocks and is "loaded." The Obama Fund is primarily centered on tax exempts, like muni's and so forth.)

    The Emerging Nation Fund, which focuses on US investments, which are expected to do well in a recovery.

    The Defeatest Fund, which is much like a money market fund, except that it charges YOU inerest.

    Finally, the Fund Fund, which invests in companies which construct other funds.
    Reply
  •  
    Jun 09 10:55 AM
    LOL, there was a blue fund (no joke) but it either merged into another fund or changed its mandate due to a lack of investor interest.
    Reply
  •  
    Jun 09 11:32 AM
    Some stocks I hold for the dividends, higher than I can get from the bank.
    Some stocks I hold in expectation of benefiting from higher and higher energy prices.
    Some stocks I hold because the company provides cheap but acceptable options for middle-class consumers as the economy sinks.
    (My husband has bought some foreign stocks, but I'm nervous if I don't understand the industry and the stock's position in it. I should study up on these topics, but I've got two businesses to run and a house to sell.)

    Hmm, I guess I'm pessimistic about the economy and optimistic about (part of) the stock market.
    Reply
  •  
    Jun 09 11:39 AM
    I use themes to construct portfolios. In it's defence all I can say is "It works for me". And I use the ones Roger cited. One additional might be "Curriences"... The relationship between the dollar and other currencies is fundamentally changing and will evolve over time. DBV works here, Half of RYMFX works, as does WIP and others. Waiting for a multi currency MMF.
    Reply
  •  
    Jun 09 01:08 PM
    Thematic approaches work well in reverse. I avoided and then shorted financials and real estate over the last couple of years.
    Reply
  •  
    Jun 09 02:16 PM
    +1 on thematic shorting. ETFs make it easy to short Financials, Consumer Goods, Healthcare, etc. Now DB has short commodity ETNs as well, gold, ag and broad-spectrum.
    Reply
  •  
    Jun 09 10:46 PM
    ETFNerd should crawl back into his hole, or maybe SA should 'use some judgement' in whom they allow to join and post. If you don't like the article, why did you write such a lengthy reply? To show how much smarter you are than the author? Why not become an author yourself s o we can trash you ?
    Reply
  •  
    Jun 10 07:31 AM
    Hm, i wonder whether all this lengthy thinking and designing of a top-down portfolio really offers any long-term benefit? I am certainly aware of the importance to look at the top-down picture, macroeconomics etc., too, but when it comes to where really put my money into, I do not see the benefit of thematic portfolio segmentation. If I can identify a dozen of great companies with strong fundamentals on a bottom-up basis that have the power and the resources to also weatheran adverse macro environment and trade at a good price - why should I then care about all this segmentation stuff?? it just levels everything out. I have never seen any of the great value managers (you may look them up vbia gurufous.com, for instance) following this kind of approach presented here. If the majority of the stocks identified to be worth buying are in the, say, energy and commodities sector -why should I restrain myself to some % of overall portfoli? why should i get out of my way to find a somewhat reasonably priced stock in annuities or large companies or healthcare or Obama! or whatever - only to skip a much better stock in energy?
    This simply makes zero sense.
    I don't believe in frequent portfolio-reshuffling and such kind of top-down portfolio implies exactly this frequent rebalancing and re-designing.
    and, before all the ETF-fans pick at me: ETFs don't make a huge difference in this regard. they are very good for people with limited time resources and limited understanding of the stock market. but trading in and out is desastrous long-term with etfs as well. transaction costs and taxes add up enormously over the long term.
    Reply
  •  
    Jun 10 12:33 PM
    To the disciple of the "Oh, that sounds like a good idea" school of investment thought:

    I guess 164 words would constitute a lengthy reply if you are not used to reading. If you object to what I posted so much, why not try to disprove it by arguing cogently that Mr. Nusbaum's article is not fluff? Tell us what great insights you garnered from his article.

    Instead of huffing and puffing for criticizing Mr. Nusbaum, why not reflect on why you are such an eager consumer of his cowpies?

    Information without dissent is not information, it's propaganda. Now take off your benito mussolini hat and realize that we have a first amendment in this country that allows views other than your own.
    Reply
  •  
    Jun 10 04:16 PM
    this is all BS. These self styled finanaical gurus create themes/objective to generate more commission cash flow. That's where they earn their bread. Is it funny that financial analysits and fund managers are the only group that does not provide any type of assurance on their product. forget about increase they don't even assure keeping value intact..... All they profess is use my service because you cannot do yourself.... Will you buy a car if manufacturer says I don't know if it will work ?
    Reply
  •  
    Jun 17 08:40 PM
    Financial Analyst Hater and ETFnerd,

    Both of you are a disgrace. I have reported you to SA management and asked that you be banned from future comments. Your hateful approach is only matched by your lack of content. You damage the good name of Seeking Alpha and you attack authors without basis.

    You hide behind your anonymous status and hurl at authors who make serious efforts at sharing ideas, whether right or wrong. You have no ideas. You have only angry, insulting, empty comments.

    The sooner Seeking Alpha bans people like you the better for them and for all of us as readers. Go away! You are not welcome here!

    Mary
    Reply
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