Trust the Model
Penn Street Sector Rotational Portfolio
G. Michael Mara
Author: Alexander Vantchev
Last Update: , :
|In a market longing for risk control, stability, and predictability, it is no surprise to find good asset management ideas born in trusts and other wealth management departments. When Michael Mara left his trust job, he had one of those ideas and a plan to implement it in a mutual fund format. The result is a portfolio with a steady top-quintile Lipper ranking in the multi-cap core category.
||Penn Street Sector Rotational Portfolio|
The turnover for this portfolio is impossible to say what it will be ten years from now, but I can tell you about the last three years: it was not what you would expect from any long-term investment portfolio. It has been about 70% on a yearly basis, between 50% and 70%.
Q: Do you have any limitations or restrictions in terms of what securities you should buy and not buy?
We are free, provided that if falls within the top 1250 U.S. domestic equities by capitalization.
Q: And which companies make the cut right now – mid-cap and large-cap only?
This would be called a multi-cap core. It is mid-cap and large-cap, and not all mid-caps – from the mid-level of mid-cap and above. We rely on data coming in from other sources and when you have to do some fundamental analysis, it is difficult to rely on just pure data at the small-cap level.
Q: Since you don’t visit the actual companies, who do you rely on supplying the relevant data?
I don’t do fundamental analysis, but one of the factors is that I rely on what the analysts are saying out there. They are doing fundamental analysis. So, if a company had no analyst following it on a national level, it is not going to qualify for the model – it is going to rank really low, because it will score zero on most factors. So, to have a national-level analyst, or a number of national-level analysts following it, is important. Otherwise, it may go to the top 1250, but it is going to score horribly in the model, because it has to have some analyst following.
Q: Have you ever had to make tweaks and adjustments to the model itself?
At this moment we always look at the different factors, we run regressions and all that kind of stuff, but we have at this time in the last five years that I have looked at the model, we have not made any adjustments in the actual weightings of the factors that we look at in the model.
Q: As a portfolio manager, you are also obliged to tell the people what can go wrong with the model? What do you think can break it?
“What goes wrong” is first and foremost in my mind, because I come from a trust environment. I have to protect the principal. What could go wrong? Let’s say you have a particular bounce in the market on an upward basis, it doesn’t make sense according to the factors that we have in the quant model. The market gets ahead of itself. Take technology. For some reason, psychologically, it has drastic upswings. We are going to miss that. What we are seeing is, when that does occur, there is a regression back to where it should be. And when the actual earnings come out, that is when I get a lot of outperformance. But when a particular sector like technology takes off like crazy, I am not participating. The model won’t let me do it. I have to stick to the discipline in the process. What I would do is I really believe that I trade off the fundamental or the psychological variations in the market for process and speed, without anybody, Mike Mara, or any other portfolio manager saying: “God! I love this particular stock right now. It doesn’t rank well, but I am going to buy it on a hunch, anyways.” I can’t do that.
Q: What would you tell an investor who is considering to put some money into your fund? What can they expect and what they should not expect?
From the Sector Rotational portfolio, an investor can expect a consistent process in which you are participating in all styles in the market at any given time, and participating in the majority of industry sectors of the market at any given time, which is fully invested and does not make bets as to whether the market is going to be up and down this month or next month. This model, this portfolio is for the long-term investor. It is not one which is designed to help the market timers. It is not good for them, it is not attractive to a market timer.
If I am an investor, it would be a wonderful place to build my core, and then, if I want to make bets, let me buy a small-cap growth company, or let me buy something that is out there on the Richter scale. But for the core, it is a great alternative for the S&P 500. It could be in anybody’s portfolio.
What they should not expect is in up markets, driven by one particular sector, we will not shoot for the moon. We won’t participate in any single sector that will take the market away, because we fundamentally believe that there is always a reversion to the mean. We just believe that our mean will always be higher than the average market itself as established by the Russell 1000 or the S&P 500.
1 2 More: Mutual Funds Archive