Author: Charles Sizemore

Covestor models: Sizemore Investment Letter and Tactical ETF

Congratulations, dear reader.  If you are reading this, it means you survived 2011, a year whose volatility will be burned into investors’ memories for a long time to come.

I expect the high volatility "risk on, risk off" market to continue through at least the first quarter of 2012.  Until we have something resembling a resolution of the European sovereign debt crisis—whether it be the creation of a “fiscal union” that Germany wants (and Britain vetoed), a massive bond-buying spree by the European Central Bank, the issuance of jointly-guaranteed “Eurobonds,” or some combination of the three—risk appetites will continue to wax and wane based on the news coming out of Europe.  I’m not oversimplifying when I say that nothing else matters at the moment.  The markets live or die based on the often contradictory delphic utterances of European politicians and technocrats.

As a value investor, this is frustrating to me. Still, we shouldn’t complain.  Sizemore Capital’s portfolios posted respectable returns in 2011.  Investing based on durable, long-term macro themes makes sense, even in a market like this, and our investors have avoided the sectors that have taken the most abuse, namely financials and materials.

Still, the volatility among even our more conservative holdings has been sickening to watch. It helps that the vast majority pay a respectable dividend.  In a trendless, volatile market, the only way you can make money is to milk the dividend yield or have impeccable timing as a trader.  And given that this market has confounded even the greatest of investors (living legends George Soros, Bill Gross and John Paulson all suffered highly-visible losses in 2011), focusing primarily on dividends would seem to be the more prudent course of action.

As we enter the first quarter of 2012, Sizemore Capital will continue to maintain a core portfolio of solid, dividend-paying equities.  But we also intend to take selective risks in both developed and emerging markets as opportunities present themselves.

In the Tactical ETF Portfolio, we increased our allocation to Europe with a new position in the iShares MSCI Germany ETF (EWG).  Eurozone crisis or not, we believe that German stocks are priced to offer excellent returns in the year ahead.  It helps that many of Germany’s biggest and best-respected companies—including our favorites Siemens (SI) and Daimler (DDAIF)—get significant percentages of their revenues from emerging markets.

Overall, our portfolio strategies in 2012 will involve:

1. Significant allocations to Europe and Emerging Markets

2. A continued focus on income generation through dividends.  In a trendless market, dividends may be your only reliable source of return.

3. An avoidance of precious metals.  Gold proved itself to be less of a protective hedge and more of a speculative risk asset in 2011.  Though we may see tactical long or short opportunities as the year progresses, we see little value in gold and precious metals as long-term investments.

4. An avoidance of bonds in all actively managed portfolios.  Though we are not bondbears per se, (we see a low interest rate environment prevailing for the foreseeable future) at current prices we do not find bonds attractive.

Looking forward to a profitable 2012,

Charles Lewis Sizemore, CFA