Paul Dietrich's Global Investing Trends Report

Active Investments And Buy-And-Hold Investments

Posted September 27, 2007 · 0 Comments

Dear Paul,

 

How do I explain to my clients, the difference between “ACTIVE INVESTMENT MANAGEMENT” and “BUY-AND- HOLD INVESTMENT MANAGEMENT?”

 

An important new academic study, “SECTOR ROTATION AND MONETARY CONDITIONS,” which is slated for publication in the prestigious JOURNAL OF INVESTING early next year, gives new academic confirmation to the FOXHALL investment management strategy of “active investment management.”

 

The study was conducted by Robert Johnson, managing director of the education division of the CFA (Chartered Financial Analyst) Institute in Charlottesville, Virginia, along with co-authors C. Mitchell Conover, associate professor of finance at the University of Richmond in Virginia; Gerald Jensen, professor of finance at Northern Illinois University; and Jeffrey Mercer, professor of finance at Texas Tech University.

 

FOXHALL INVESTMENT STRATEGY COMPONENTS

 

As you know, the FOXHALL investment strategy consists of three components:

 

GLOBAL DIVERSIFICATION:  Almost every academic study has concluded that a global investment portfolio is safer, less risky and more diversified than putting all your eggs in one basket-even if that one basket is the U.S. stock market.  We have seen over the past two months just how volatile the U.S. stock market can be.  Our clients gain the advantage of global diversification and exposure to the fastest growing markets in the world.

 

DEFENSIVE INVESTMENT STRATEGY:  FOXHALL has created and uses a proprietary, methodology and discipline that identifies major stock market corrections, bear markets and recessions at an early stage.  Once this computer model “trigger” is hit, FOXHALL decisively moves client investments to bonds, money market funds or other defensive investments in order to protect our client’s investment principal. 

 

OFFENSIVE INVESTMENT STRATEGY:  When the stock market is going up in a long-term “bull market,” FOXHALL stays invested in the stock market.  Foxhall continuously monitors each of its investments and as the stock market and economies are outperforming the market at any given time.  This investment technique is called “sector rotation” by investment professionals.

 

NEW “JOURNAL OF INVESTING” STUDY

 

The upcoming JOURNAL OF INVESTING study gives academic confirmation to the FOXHALL “OFFENSIVE / DEFENSIVE” investment strategy that we have used for years.  The study states that as the U.S. economy changes, Federal Reserve policy changes with it.  We saw that happen this month, when the Federal Reserve recognized that the economy was weakening because of the housing crisis and they cut interest rates.

 

This new study concludes that as the economy changes (and you can track those changes by watching changes in Federal Reserve interest rate changes) a “SECTOR ROTATION” strategy (like we use at FOXHALL CAPITAL) “could have substantially improved portfolio performance over a broad-market-index portfolio over the past 33 year’s according to the study.

 

SECTOR ROTATION STRATEGY

 

The results indicate that investors would be well served to modify sector exposures during different monetary-policy environments,” said coauthor Robert Johnson, in a September 17, 2007 interview in INVESTMENT NEWS.

 

Mr. Johnson went on to say that during phases of the economic cycle, “Investors would have improved performance by placing greater emphasis on cyclical stocks during periods of Fed easing and overweighting defensive stocks during periods of Fed tightening.”

 

“Cyclical stocks did particularly well during expansive periods,” Mr. Johnson added,

“returning an average of 20.27%, but fared poorly during restrictive periods, returning

an average of just 2.25%.  Non-cyclical stocks performed much better than cyclicals during restrictive periods, the study shows, returning 10.24%, but underperformed cyclicals during expansive periods, returning 14.65%.”

 

THE IMPORTANCE OF “ACTIVE INVESTMENT MANAGEMENT”

 

These results, Mr. Johnson argued, “demonstrate that investors could improve their portfolio’s performance” by increasing or decreasing exposure to certain sectors depending on the economic cycle.

 

This is just one more academic study debunking the old and out-dated academic presumption that a “buy-and-hold” investing is the way to invest for the long-run.

 

“Buy-and-hold” investing simply means investing all of your money in say an S&P 500

INDEX FUND that follows the broad stock market.  The strategy requires that you hold that S&P 500 INDEX FUND at all times, even if the economy is going into a recession.

 

Unfortunately, the reason this strategy doesn’t work is that clients remember the last

“bear market” in 2000, 2001 and 2002 when the S&P 500 INDEX dropped almost 50% during that period.  Currently the S&P 500 INDEX is still not back to its 2000 high price and it is now seven years later.  That means after seven years, you still haven’t earned back what you lost in the last “bear market.”

ACTIVE RISK MANAGEMENT  

 

Most investors would prefer to not lose most of their principal every time we have a cyclical “bear market” or recession.  They would prefer an “active investment

management” strategy that moves their investments to bonds, cash or other defensive investments.

 

That is the conclusion of this latest study and it is always nice to have a major academic study confirm that the investment principles we use at FOXHALL CAPITAL are based on a strategy that works and overtime will, as the study says, “substantially improved portfolio performance over a broad-market-index portfolio.”

 

Until next week …

 

-Paul Dietrich

dietrich@foxhallcapital.com

800-416-2053

 

Disclosure:  The opinions and portfolio information provided in the Foxhall Global Outlook are subject to change at any time, and are not to be construed as advice for any individual nor as an offer or solicitation of an offer for purchase or sale of any security.  Client accounts may differ from model allocations due to many reasons.  All investment strategies offer the potential for loss as well as gain.  Individuals should consult with their financial professional to determine an investment strategy appropriate for their objectives, risk level, and time horizon prior to investing.  Past performance is not a guarantee of similar future performance.

 


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About Paul Dietrich
Paul Dietrich is the Chairman, CEO and Co-Chief Investment Officer of Foxhall Capital Management, Inc. (Foxhall).  Foxhall currently manages investments for individuals, mutual funds and private institutions throughout the United States. Paul Dietrich is also a portfolio manager to a publicly traded mutual fund, the Foxhall Global Trends Fund.
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