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Keeping Your Porfolio Healthy

An important portfolio construction idea I have harped on is simple avoidance.

Another thing I have harped has been the extent to which I have been underweight U.S. financials for a long time. Both in articles for TheStreet and on my blog I wrote about warnings from the market about the weighting of the financial sector in the S&P 500, greater than 20%, along with the inverted yield curve as indicating some sort of problem coming.

As the crisis unfolded and then the market started to rally a year and half ago, including some huge trading moves up from financials, I wrote frequently that it made no sense that the worst financial crisis in 80 years could wrap up in 18 months. There would be more shoes to drop.

The latest business with robo-signing foreclosures might be another shoe or not but I continue to have no interest in the U.S. banks. I simply want to avoid the exposure and whatever headaches, real or perceived, might go with them.

In the past I have disclosed on my blog owning MSCI (MSCI - Get Report) for clients for a little while. It has a couple of different business lines but is most known for index licensing which would seem to be a growth industry thanks to global ETF proliferation and other trends related to passive investing.

This idea will either pan out or it won't but whatever happens with the stock there is no reasonable fundamental link to all that ails the banks -- that which we already know and that which we may learn about in the future.

Not surprisingly MSCI went down about half as much as the Financial Sector SPDR (XLF) during the worst of the crisis and is now higher than where it was back in late 2007 while XLF is still down more than 50% from its peak.

ETFs are very useful but some stock picking is important too. Where this one sector might be polluted for a long time, financial sector ETFs might not be a great way to go, certainly not my first choice.

A stock like MSCI has an easy catalyst to understand, growth in indexing as an aging population gets more serious about saving and investing, and the lack of fundamental connection to the crisis is also easy to understand.

In the time I've held the name it has been quite volatile, got hit hard for a little bit, did a large transaction but has done noticeably better than the XLF albeit with a bumpy ride. Going forward there can be no certainty about how it will do but from the top down it avoids what I think is a lousy part of the market and offers a chance for growth.
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FEFN $27.63 -0.72%
EUFN $17.18 -1.80%
XLF $20.95 -1.32%
BAC $12.95 -2.26%
C $39.86 -2.28%


Chart of I:DJI
DOW 16,204.97 -211.61 -1.29%
S&P 500 1,880.05 -35.40 -1.85%
NASDAQ 4,363.1440 -146.4150 -3.25%

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