Republican Policies Fund (GOP) & Democratic Policies Fund (DEMS)
We hear the term all the time: the trump portfolio. We know, intuitively, that what happens in Washington has a major impact on stock returns. But until recently, there wasn’t much we could do about it, except cherry-pick individual stocks and hope for the best.
That’s where GOP and DEMS come in. with a thoughtful design and outstanding research to back it up, GOP and DEMS allow investors to position their portfolios for the places where new policy initiatives are taking us. Think the republicans will get NAFTA revoked? GOP is ready for that. Think resurgent democrats will put healthcare expansion back on the table? DEMS has you covered.
These are two high-quality funds worthy of your consideration.
Matt Hougan, CEO, Inside ETFs: What drove you to develop these funds and, indeed, to launch EventShares?
Ben Phillips, Chief Investment Officer, EventShares: In the run-up to the last presidential election, the founders of EventShares were looking at the potential Trump vs. Hillary outcome and realized there was going to be a clear-cut set of companies that would benefit if Trump got to the White House and another that would benefit if Hillary got to the White House. We saw that policy differences would really drive investment choices in the future and we thought, why is no one building these portfolios for investors to utilize?
How do policy ideas translate into stock performance?
When we think of the GOP and DEMS funds, we think about the top five policy priorities for each party over the coming years that are going to impact markets. For the GOP fund, that means defense and border protection, deregulation, infrastructure, U.S. energy independence and tax reform. For DEMS, it’s health care expansion, environmentally conscious, social good, educational access and finance reform.
Once we’ve selected the policy priorities, we drill down into industry and conduct individual security analysis to find stocks we think will outperform, and short positions that we think will experience a price decline. As an example, in GOP, with energy independence, we’re long Cheniere (LNG), which benefits from U.S. natural gas production, less stringent environmental regulation and improved competitive positions for LNG exports. These are GOP-policy-driven initiatives.
On the short side within GOP, we’re short KSU, or Kansas City Southern. Half of its revenue comes from Mexico. On the day after Trump was elected, KSU was down 11%. As NAFTA [the North American Free Trade Agreement] has the potential to be renegotiated, you could see a material impact on KSU’s business.
What about DEMS?
In the DEMS fund, we own a lot of health care stocks, and particularly ones that are focused on reducing weight and improving the efficiency of the system.
On the short side, we are short some financials including Goldman Sachs (GS). Goldman is an investment bank that converted into a bank holding company. To the extent there is continued regulatory focus on banks from Democratic policy efforts, we’d expect that to impact Goldman’s proprietary trading activities and its use of leverage.
Why go long/short and not long-only?
We wanted to identify potential winners and losers. We saw in the case of Kansas City Southern that there are clear-cut winners and losers from these policy enactments.
The ability to go short gives you the flexibility to position the portfolio appropriately.
What is the potential short weighting and the current short weighting?
We can short up to one-third of the portfolio. Currently, we’re around 6%.
Where do these funds fit in investor portfolios?
We think first and foremost that the portfolios stand on their own as potential core holdings. We look for solid companies that play out with the policy trends that are driving them in the future. The funds fit as a general large-cap allocation with an embedded policy catalyst.
How do I decide which fund to buy?
Don’t I just buy the GOP portfolio today because that’s who’s in office? Investors should look at their overall portfolios and ask themselves, am I overexposed to one party’s policies? It’s an important consideration that investors haven’t been asking but should. Alternatively, if you want to be overweight one side, use our fund to make that bet as well.
You’ve invested a lot in your website and providing great research. Why is that research important?
We intend to be thought leaders in this space, and want to provide educational resources to anyone who wants to better understand the way policy impacts their portfolio. We launched the firm because there really wasn’t a product out there that helped you make sure you had the right policy balance in your portfolio. We want to be the hub for that research process.
Will you be evaluating and replacing the policy themes in the GOP and DEMS portfolios, or are they fixed?
They are definitely not fixed. We will change them as policy priorities evolve. We aim to be thoughtfully active. Take tax reform as an example. It drives 20% of the GOP fund. If tax reform goes through, I think we would let that play out in the portfolio over a number of years. But if we determine it had played out, we would look to perhaps reallocate that part of the portfolio to another GOP policy priority. We want to be both forward-thinking and long-term oriented.
How do you weight stocks in the portfolio?
We rebalance to equal weight every quarter.
What if there’s gridlock? How do you invest these portfolios if Washington isn’t getting anything done?
The stock market is forward-looking. Shifting probabilities on different policies impacts stock prices.
If you had to sum up GOP and DEMS in one paragraph, what would you say?
Every investor should consider the impact of policies and policymaking on their portfolios, and they should understand where they are over- and underexposed. GOP and DEMS offer a way to respond to what they find.
[Editor's Note: The graphic below erroneously lists these two funds as having launched Oct. 17, 2016. They launched Oct. 17, 2017.]