In the April 2009 issue of Financial Advisor magazine there appeared an article entitled "Dodging The Bullet." The point of this article was to interview three advisors who excelled in protecting their clients from the ravages of the 2008 market meltdown. The investment strategies of each advisor were examined to find lessons all advisors could benefit from when navigating future market crises.
Reactions to this article were mixed. Although some advisors took it at face value and presumably benefitted from its lessons, others were more skeptical, questioning the strategies employed by these advisors. The common sentiment among this second group was, "OK, they got their clients out of the market in time, but when did they go back in and how did they know to do so?"
To answer this question, this article follows up with the same three advisors to see how their client portfolios have fared since early 2009 when they were first interviewed.
D.L. Blain & Co, LLC
New Bern, N.C.
In the April 2009 article, David Blain of D.L. Blain & Co., LLC in New Bern, N.C., explained that he moved to an underweighting in equities (10% to 15% of portfolios) beginning in October 2007, which helped him contain the losses in his clients' portfolios to 5%-9% between March and November 2008. By December 2008, said Blain, he was back in equities to the tune of 55% across all portfolios. Today, that average is closer to 65%.
I asked Blain to take me through the time line between 2008 and now, and asked what got him back into equities by December 2008.
"Between December 2008 and April-May 2009," he says, "our models suggested an increasing allocation to equities. The market decline in January-February 2009 negated some of that and we underweighted again, but we were back to a fully weighted position by June 1, 2009. So between December 2008 and June 2009, things were very tenuous. We erred on the side of caution with a largely underweighted position, missing the first six to eight weeks of the rebound."
Blain bases his models on research from Ned Davis Research (http://www.ndr.com/invest/public/publichome.action), which keeps him abreast of current and expected economic scenarios and statistics. (Ned Davis Research is an independent financial firm providing unbiased investment research and investment management guidance to global institutional investors). "My process is very quantitative," says Blain. "The three types of Ned Davis research I pay the most attention to are equity valuations, investor sentiment and momentum factors."
Blain doesn't just review this research and make a seat-of-the-pants decision to change investment weightings. He actually pulls selected data points from Ned Davis Research into his own proprietary spreadsheets, which then guide him in decisions to over- or underweight asset allocations. "It's a system that's evolved over 20 years in practice that results not in decisions to be either all in or all out of the market but, rather, gradual changes up or down." And it's the system that has had him overweighting equity positions since June 2009.
What do his spreadsheets tell him about the future? "We are very cautious about equities as we head into summer 2011. It wouldn't surprise me if we entered a bear market sometime in the next year. However, I manage portfolios based on what's actually happening now, and both equities and commodities are still in a nice uptrend."