Creating a model that outperforms the S&P 500 requires vision, discipline and the ability to recognize positions that will and won’t support the goal. This week we spoke with William DeShurko of 401 Advisor about his Value Plus model which has been outperforming the S&P since May.
Covestor Live: In July, your Value Plus model had an 8.27 percent return. What steps did you take to achieve this?
William DeShurko: Consistency in strategy. Our goal is not total return but high dividend yield. While some market participants interpret that as a low capital growth strategy, we believe that in a low growth economic environment high dividend achievers are also most likely to reward investors with capital gains.
CL: In April you sold PEY PowerShares High Yield Equity Dividend Achievers Portfolio. What made you decide it was the right time to sell?
WD: PEY is a nice holding with about a 4.5% yield (CL Note: Morningstar.com reports a 4.40 percent yield as of August 19th, 2010). But we thought the market might soften and in a declining market we prefer either cash or a higher dividend to provide a bigger downside cushion.
CL: The last buy you made in the model was JNK SPDR Barclays Capital High Yield Bond ETF. Can you tell us why you chose that ETF and your reasoning behind not making any further transactions in July or (so far) in August?
WD: Ideally we will hold 70% – 80% of the portfolio in high dividend paying stocks; 20% in JNK or iShares iBoxx $ High Yield Corporate Bond Fund FEF (HYG) if we have a positive outlook, 20% in cash if “neutral” and up to 20% in a short or leveraged short ETF if we think the market is trending down. We decided to use JNK as our “timing” portion because it had a very attractive yield of over 10% at the time (CL Note: Morningstar.com reports a 10.80 percent yield as of August 19th, 2010) and is very liquid. We also feel we can time the holding fairly well to add value to the portfolio.
We actually just made two sells – PDL BioPharma Inc (NASDAQ: PDLI) got hit by an announcement that Genentech will cut back on Royalty payments. Since this will likely affect the dividend we sold immediately. We also just sold the JNK position. JNK has been declining all month and technically hit our sell point. We may get whipsawed on this one, but I’m hoping it drops in price to get the yield back over 10% before we buy it back.
We also need to add another position to the portfolio; I’m waiting a bit to see if we can get a better idea of the intermediate market direction.
CL: What news, trends or events are you watching to help you determine your next move in the model?
WD: As I mentioned JNK is purely a technical trade, so we’ll be watching the charts on it. If the market stays pretty flat this week we’ll look to add a high dividend holding – something in the 8% or better range. If we get optimistic, say SPY moves above its 200 SMA then we will look for a lower yielder but a stock that has traditionally increased its dividend – something like McDonald’s Corp. (MCD) with a current yield of 3% (CL Note: As of August 19th, 2010, MCD’s dividend yield is 3%). And if the market breaks down before reaching its 200 SMA we may go short with SH.
News-wise I find the midterm elections to be interesting. Historically the market posts strong returns when Congress changes hands – with strongest returns coming historically with a Democratic President and Republicans gaining control of the House. The University of Iowa tracks the odds on the Democrats holding, losing, or gaining seats in the coming election. The odds of the Dems losing the House have gone from about 53% at the beginning of the month to 65% on the 16th. This is a pretty good lead, and if it holds for a couple days and the market trends up, we will likely buy into our fully invested positions. More info can be found here. By the end of the year we want total dividends and interest paid into the account to be around 8% of the beginning value, so our bias is to be long and fully invested. I just really hate to lose money!