Updated: Sep 2
Back in mid-2019, Pure Portfolios was featured in Citywire Magazine's My Model Portfolio series (you can read the first article here). Much has happened in global financial markets since then. Recently, Citywire reached back out to Pure Portfolios' Founder Nik Schuurmans for an update on current positioning.
You can view the full article as it appears in Citywire's December issue here. We have provided the transcript below.
Q: We looked at this portfolio back in mid-2019. Back then, you had a 14% allocation to short-term U.S. Treasuries. But now, you're out of them entirely, why?
NS: That's a reflection of what's happened with the interest rate complex. After the Federal Reserve cut rates, any safe asset class was essentially like owning cash. We rotated out of short-term Treasuries and did two things:
First, we plugged the short-term bond component of our portfolios into corporate credit. We still wanted a short-term allocation in our fixed income portfolio, but we needed to generate some yield, so one to five year investment-grade corporates seemed like a logical move.
Second, we took some of the short-term Treasury proceeds, and then slightly from intermediate-term Treasuries, and added it to gold. We had a 3% position to gold and bumped that up to around 10%.
Q: Many other firms have increased their cash allocation instead.
NS: Well, our clients pay us to be invested. And the opportunity cost of holding cash is somewhat high, because it's yielding nothing, while you can comfortably clip 1.5% in a corporate bond portfolio. So that's kind of an obvious choice.
But the second thing is, it's dangerous when you're fluctuating your cash balances, because that means you're making larger tactical and active bets. So, if your cash position is fluctuating between 0%-20%, to me, that says there's an element of market-timing in there.
2020 has been a horrible year to follow gut instinct, or what-do-you-think-happens-next mindset, because nothing has followed a linear, logical path.
Q: Why did you increase your gold allocation to 10%?
NS: This might be the only pure tactical trade we've ever made. At our firm, we are very rules-based, we've built an algorithm that runs every 30 days, so it's very rare we would have a human overlay - but that's what happened.
Basically, as governments around the world become more fiscally reckless and more prone to monetary policy experiments, we felt it was attractive to add a currency that a central bank or bureaucrat cannot mess with. Bitcoin and gold will fall into these two categories. Unfortunately, Bitcoin is even more polarizing than gold, and it's not part of a mainstream retail portfolio - yet.
Q: Why do you use the Aberdeen Gold Fund rather than the popular SPDR Gold Trust (GLD)?
This fund actually owns physical gold that's held in a Swiss trust, and those ETF shares are a direct proxy for the gold that's physically stored. Many of these other gold ETFs are based on futures contracts, so it's "paper gold," whereas this is an actual physical commodity that you can touch.
Q: In the equity piece, you've gotten a bit more international since 2019.
Well, emerging and international markets have started to behave better relative to U.S. markets. And then, you look at the opportunity set. U.S. equity valuations are in the most expensive percentile, while emerging and international markets are much more attractive on a relative basis.
It's not a huge swing - we still have a decent allocation to U.S. equities - but we're slowly nudging up our international exposure.
Source: Citywire, Pure Portfolios
The above graphic is a snapshot of our Balanced Growth model portfolio. This is not investment advice.
Q: What's your view on large-cap U.S. equities?
In general, I think advisors and retail investors tend to overweight what just happened. The last 10 years have been really good for U.S. equities, and particularly in the last couple years, for big tech stocks, which make up ~25% of the S&P 500 index. But no one was looking to pile into U.S. large cap stocks at the end of 2010.
What I'm saying is, we want to be mindful of recency bias. I don't make market forecasts, but I'm certainly paying attention to what's worked and what hasn't worked, and I expect that baton to get passed at some point.
Again, we're not making any large active bets. But markets move in cycles and the outperformance of U.S. large caps isn't going to continue forever. Unfortunately, many people tend to extrapolate outperformance into the future. So we're just trying to be a little more measured.