You may have noticed some recent changes to the holdings in the AFG Alternative Assets Model. This portfolio was designed to provide returns and volatility that are inconsistent with traditional equity and fixed income markets. As such, I have included holdings that are representative of hard assets, like palladium, platinum, and silver, real estate and timber, agriculturals and commodities.
In addition to non-correlation, this portfolio should serve as an inflation hedge and stabilizer. For client portfolios where income is not a priority, I would consider it to be a partial substitute for a bond allocation, particularly in periods where interest rates are expected to increase over the short to intermediate-term.
That said, the return expectation is not terribly high on this model. My view is that an alternative investment model should provide average returns over a 3-5 year period of 2-5%. The closest comparison benchmark on the Folio Investments platform is the Dow Jones Credit Suisse Core Hedge Fund Index. Since inception (May 26, 2010) to today, the AFG Alternative model has returned 17.57% gross vs. the benchmark return of -3.82%. Over the last year, the model has returned 11.39% vs. 3.23% for the comparison index.
Over the last several months, I have purchased a subscription to a hedge fund research service, which provides me with interesting ideas periodically. Most of the ideas involve public companies that may be considered “special situations”.That is, they may be turnaround stories, buyout candidates, or companies with a new catalyst (an activist investor or undiscovered facet of their business that hasn’t been realized by the market yet). They may be larger companies, but typically fall into the mid or small-cap category. The holding period will typically be anywhere from 1 mo. to 3 years.
After a full investment review, the AFG Alternative model has started to take advantage of some of these situations. Examples include:
- Bassett Furniture – Gain of 18.53% since purchase
- MEMC Electronic Materials – Gain of 34.58% since purchase
- Napco Security Technologies – Gain of 16.48% since purchase
- Orbcomm – Gain of 13.24% since purchase
- Rent A Center – Loss of 2.74% since purchase
- Tessera Technologies -Gain of 4.97% since purchase
These will normally be smaller positions in the portfolio, but will share the common thread of a special situation with a finite timeframe. It is not our intention to change the overall complexion of the model into a stock model, but to include assets which don’t fit neatly into a standard equity model and can possibly enhance the returns of the Alternative Asset strategy. I do not intend to have these holdings amount to over 20% of the assets in this portfolio.
Some of the current statistics on AFG Alternative:
- Beta vs. S&P 500: .63 / Below Average
- One year Risk Profile: .48 / Low
- Volatility / Absolute Risk: 12.19% / Below Average
Let me know if you have any questions.
—Doug Kinsey, CFP, AIFA
