Manager says that investors who've remained disciplined in the past 18 months deserve to get the most out of an inevitable rebound in stocks.
Mark Armbruster doesn't consider himself a market timer.
Still, he's getting his high net worth and institutional investors ready for a turnaround in stock markets around the world.
"Nobody knows when the market's going to come back. But all of my clients suffered from the downturn. Now that they've remained disciplined by sticking with their long-term investment plan, they deserve to be positioned to fully take advantage of a recovery once it occurs," said the Pittsford, N.Y.-based adviser and portfolio manager.
Stock valuations are extremely low, he adds. "If you look at price-to-trailing 10-year earnings, U.S. equities are as low as they've been since 1991," said Armbruster. "When I think where we were in November, bonds weren't safe and money market funds were breaking the buck. It was a really nasty situation."
Today, domestic stock markets are selling at about the same levels, he notes. "But the fundamentals have improved. The economy certainly isn't doing well, but there's definitely a sense of stability in the stock markets that we weren't seeing just a few months ago," said Armbruster.
As a result, he's making sure investors aren't letting their long-term asset allocations to stocks slip. "We're actively rebalancing right now," said Armbruster.
His U.S. stock allocation plans are targeting the Wilshire 5000 index, which takes a total stock market approach. "Then we layer on exposure to different markets," said Armbruster. "We do that using a mix of exchange-traded funds and mutual funds from Vanguard and Dimensional Fund Advisors. It's a sort of mosaic approach that's not strictly ETFs or mutual funds, but a combination of the two."
He starts with adding a small-cap stock bias and a value-style slant to overall portfolios. For those funds he prefers the iShares S&P SmallCap 600 Index (NYSE: IJR) and the DFA U.S. Micro Cap Fund (DFSCX). "There's not a lot of overlap between the two," he said. "IJR has bigger small-cap stocks than the micro cap fund. So I'm trying to cover the entire market, but push a portfolio's return profile down the market-cap spectrum."
But he's also a big believer in tilting toward value-styled stocks. "Historically, the value premium has been about three times bigger than the size premium," said Armbruster. "That means if you put 10% of your portfolio into small-cap stocks and 10% into value stocks, the expected return from the value fund would be three times greater over time."
He doesn't mix and match along those lines, however. "I don't use small-cap funds to gain a big value advantage," said Armbruster. "Our client portfolios only use large-cap value to overweight exposure to value-styled stocks."
While IJR and DFSCX do hold some small-cap value names, they also own growth stocks. "They're more core holdings in the small-cap part of the market," said Armbruster.
To keep expenses down, he prefers to slant overall style exposure to DFA U.S. Large Cap Value Fund (DFLVX). "That's the reason why we like to use large-cap value funds instead of smaller-cap funds to overweight our portfolios towards value," said Armbruster.
For blended large-cap-styled domestic stocks, he prefers to use SPDRs (NYSE: SPY). And for mid-cap exposure, he'll add some of the iShares S&P MidCap 400 Index (NYSE: IJH).