A solid offense and defense are equally important not just in sports, but also in investing.
[ibd-display-video id=3012111 width=50 float=left autostart=true] An investor may score big gains with an aggressive growth strategy when the stock market is rallying. But without a solid defense, those big gains could quickly spiral into big losses, as many investors found out after the 2000-02 dot.com bubble bust and 2007-09 financial crisis.
One of the money managers who recognized the need for both approaches was David Haviland, managing partner and portfolio manager of Beaumont Capital Management ( BCM ). That’s why in 2009 he created BCM, a division of Beaumont Financial Partners, which has been around since 1981.
Needham, Mass.-based BCM, which manages $4 billion, uses a tactical investing strategy to help capture upside gains and defend against steep potential losses.
“Beaumont Capital Management employs quantitative research to develop rules-based investment systems,” he told IBD. “Our systems are designed to remove emotions from the investment decision-making process and deliver what investors expect: growth strategies that have defensive disciplines built into the process.”
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Haviland selected three ETFs that met the criteria for BCM’s Sector Rotation and Decathlon strategies as of Dec. 4, 2017. BCM’s Sector Rotation strategy seeks growth in U.S. equities via ETFs representing the S&P 500 sectors. It’s designed to be equal weight in selected sectors, and raises cash when less than four sectors are owned. It can go to 100% cash if all sectors are displaying negative momentum.
Decathlon is a global multi-asset growth portfolio that seeks ETFs presenting the best risk-reward opportunities over the next 25 trading days. Instead of using cash, it seeks historically less risky asset classes as its defensive mechanism and remains fully invested.
Here, in Haviland’s own words, are his ETF picks and his explanations for choosing them:
Decathlon is a suite of rules-based, global growth strategies utilizing pattern recognition technology (PRT). Since patterns, by definition, repeat, why not take advantage of desirable predicted returns? Decathlon’s patented PRT is engineered to select ETFs from the strategies investment universe with the best predicted risk/reward profile over the next 25 trading days. The model is currently heavily allocated to equities (domestic, international, and emerging market), suggesting a positive outlook for the markets, relative to other asset classes, over the next 25 trading days. While the system selects the ETFs for investment, the portfolio manager maintains full investment discretion over the BCM Decathlon Strategies.
O’Shares FTSE U.S. Quality Dividend ETF ( OUSA ). The ETF is designed to provide exposure to a portfolio of large- and midcap high-quality, low-volatility, dividend-paying companies in the United States. Additionally, the ETF places limits on stock and sector concentration to provide a balanced diversified portfolio.
High- yield dividend stocks are a popular theme right now due to low interest rates. When an investor hears “dividend-paying stocks,” they often think of large stable companies that pay out a consistent dividend. Unfortunately, in the investment world high-yield dividend ETFs are more reminiscent of a deep value strategy where companies with high-yield dividends are indiscriminately purchased with no quality or concentration overlay.
IBD’S TAKE: On the lookout for ETF ideas that may be worth a closer look? Check out IBD’s weekly ETF Leaders column for a featured fund and a list of highly rated ETFs.
Often dividend yields rise due to falling stock prices. Many ETFs buy these stocks without a quality overlay. We liken this approach to trying to catch a falling knife. This causes a substantial mismatch between investor expectations and investment reality in many dividend ETFs that are on the market. We believe OUSA solves this problem by providing a portfolio of stable, quality-screened household names with a dividend in excess of the S&P 500 index.
While our Decathlon strategies only look out over the next 25 trading days, we view this ETF as a core holding and hold it as a fundamental allocation in other BCM strategies.
SPDR S&P Biotech ETF ( XBI ). The ETF provides equal-weighted exposure to large-, mid-, and small-cap stocks in the biotechnology sector.
We believe this ETF’s equal-weight construction is the best way to gain exposure to the biotechnology sector as it provides ample exposure to the smaller companies seeking approval of new drugs and other products, as opposed to the larger biotechnology conglomerates that dominate market-capitalization-weighted ETFs. These smaller companies naturally carry more risk than the larger ones, but if you’re looking to gain exposure to the biotechnology sector, then we believe owning larger percentages of the smaller biotech companies, which are more likely to get bought by larger firms, is the best way to participate in this subsector.
This distinction has been critical year-to-date as XBI’s return is over 20% higher than a market-capitalization-weighted biotechnology sector ETF. Despite this strong performance, XBI still remains below its last all-time high set more than two years ago in July 2015. The ETF is currently held in the BCM Decathlon strategies.
IShares U.S. Medical Devices ETF ( IHI ). The ETF provides market-capitalization-weighted exposure to manufacturers and distributors of medical devices such as MRI scanners, prosthetics, pacemakers, X-ray machines and other nondisposable medical devices.
Our Decathlon models have been quite fond of subsector exposure, and IHI has been no exception. While the health care sector has underperformed the S&P 500 index over the past few years, IHI has continued to steadily outperform. The U.S. health care sector has been weighed down by pharmaceutical companies, comprising just over 40% of the sector, as they struggle to find organic growth and are pushing up against the limits of their pricing power.
Medical device companies, on the other hand, continue to benefit from increased health care spending and tend to operate in smaller, less competitive markets. The ETF is currently held in the BCM Decathlon strategies.