Portable Alpha Daily: Conservative Portable Alpha

As of Friday’s close, the S&P Mid Cap and S&P Small Cap markets continue to be the most attractive areas to focus on at this time. This is confirmed in both our Major Market and Style Box analysis. We’re still not seeing many “buy” recommended investments, which is evident in the “AAS Status” columns listed in the Beta Portfolio below.

For conservative investors utilizing portable alpha, we reiterate our words of caution and support our stance with the Long Term Market Model, bearish since 12/8/06. The model is currently recommending a 25% cash allocation. An underweighted allocation in equities is appropriate at this time and converting from MDY to the leveraged UMPIX releases capital for a portable alpha allocation. Alpha exposure can be addressed by combining holdings of mature utility companies with intermediate- to short-term U.S. Government and Municipal Bonds.

We recognize that there are investors out there classifying themselves as moderate in nature while not being extremely bullish. Too add more alpha to the portfolio, we’re reducing the fixed income allocation by 5% and adding that to the portable alpha allocation. From there, investors seeking ideas to add alpha might consider selections from the Retail (RTH), Telecom (VOX), Real Estate (ICF) and Utilities (IDU) sectors. Retail and Telecom had a rough week, and it’s difficult to gauge the impact of the EOP deal on the REIT market, so don’t get too aggressive yet.

Alpha within specific funds might be accomplished by adding holdings of ProFunds Telecom (TCPIX), Real Estate (REPIX) or Internet (INPIX) funds. Similarly Rydex selections include Basic Material (RYBIX), Telecommunications (RYMIX), or Real Estate (RYHRX). Fidelity offers opportunities in Real Estate (FRESX), Telecommunication (FSTCX), or Utilities (FSUTX).

On the more aggressive note, potential alpha generation within specific equities from the Mid Cap Value group include BWA, LYO, PCH, MEG, CBRL, JBHT, NXL. Alpha generating securities from the All Cap Value group include NAV, CMI, BDC, JWN, JAS and that of the Small Cap Value group include CGX, SPF, RYL, AGL, SMP.