This article is based upon a recent interview I did with Seeking Alpha. SA has graciously included me in their annual preview series for three years. This year's focus was on ETFs, so I revealed something about our Dynamic Asset Allocation (DAA) method. I have not written about this system before, so it should be of interest to readers at "A Dash."
There were many good questions, drawing out ideas about the market as well as specific stock recommendations. It does a good job of explaining my bullish posture for 2011.
A Little Background
I am sometimes asked why I use both "A Dash" and Seeking Alpha, as well as other republishing outlets. The answer is simple: The audiences are very different. I can tell this from the comments and the email that I get.
Seeking Alpha has a wonderful editor who works with me and makes suggestions. They carry most of my work, but not everything. While I applaud their new program to compensate authors, I am not joining in. That is not why I write.
Each year I write two or three pieces that are published first at a different source and later republished here. Since the original interview ran there have been two important changes in the model output. Readers should note that I warned that the recommendations might be different in two weeks!
Our DAA model asks about the best ETFs for the next twelve months, but we ask the quesiton every day! This means that we can adapt to changing circumstances. The DAA is great for situations like 2008, where the model shifted to bonds, gold, and eventually to inverse ETFs.
For those reading the article today it is only fair to update the forecast to the most current recommendations. Once again readers should understand that the actual positions change many times during the year. With that in mind, GDX and KOL have dropped from the list, replaced by IYR and XLY.
And now, the actual interview -- thanks again to Seeking Alpha for selecting me as a participant and allowing the republication.
The Seeking Alpha Interview
Jeffrey A. Miller, PhD, is CEO and President of New Arc Investments. Also a fund manager at the firm, he has guided the Sector Rotation Fund throughout its exceptional history. Before beginning his financial career in October 1987, Jeff was a college professor who worked extensively with quantitative modeling of sophisticated state and local tax issues. He is the author of the A Dash of Insight blog.
Seeking Alpha's Jonathan Liss recently spoke with Miller to find out how he planned to position clients in 2011 in light of his understanding of how a range of macro-economic trends were likely to unfold in the coming year:
Seeking Alpha (SA): How do you arrive at your investment decisions? Do you have specific recommendations for our readers as we begin a new year?
Jeff Miller (JM): Thanks for inviting me to participate. My company has a variety of programs. We start with the client, not with our specific program offerings. Once we determine the client needs, we match up a blend of programs.
Some of our methods are driven by a scientific approach -- models developed by experts, models that I personally test in ways the developer could not have imagined. Other methods reflect my personal analysis of the investment horizon. The answers in this interview reflect my own analysis, stock picks, and sector picks. These have done very well over our company's history.
Meanwhile, I would like to share some current output from our Dynamic Asset Allocation model. Each day we ask the question: Which five ETFs are the best choices for the coming twelve months?
We include a carefully selected universe of 56 ETFs. We chose this fund universe to avoid a situation where our "top five" were all from the chip sector, all Latin America, or the like. We picked a top representative for each sector group, based on liquidity and a narrow bid/ask spread.
I want to be clear. We ask the question each day. We are not "buy-and-hold" so we do not hold the positions for a year. This is active management. If you ask the "one year" question every day, you get about thirty changes in the portfolio. The portfolio also includes fixed income ETFs and three inverse ETFs. We can get very conservative, and even go short if that is indicated.
As long as readers understand that our recommendations might be somewhat different in two weeks, I would like to share our current best recommendations for 2011 with a line on the logic behind them.
As you will see in the rest of the discussion, my own choices differ from some of the model recommendations, but that is just fine. It is good to have the discipline of a model, and also to have programs with different philosophies.
If you look at a chart of these ETFs you will see plenty of strength. This is a winning long-term strategy that deserves respect. It may miss smaller trades, but it keeps you on the right side of major moves. An easy way to get a feel for this is to compare the stock price to the 50 and 200-day moving averages over the last year.