Reviewing An Aggressive Strategy In A Volatile Market

Apr 11 2014, 8:17am CDT | by

Reviewing An Aggressive Strategy In A Volatile Market
Photo Credit: Forbes Business

At the onset of 2014, I recommended an investment strategy of being aggressive but diversified, and introduced the Marketocracy Explore Team as one way to implement that strategy. The Explore team consists of three to five Marketocracy Masters with proven, long-term investment track records who are performing well in the current market and exhibit little to no overlapping holdings in their portfolios.

For more information about the Marketocracy Explore Team, visit our website today.

At the close of Q1, it’s now time to review the team’s performance to see if any course corrections would be beneficial.

Marketocracy Explore Team

For comparison, the S&P 500 year-to-date through April 4, 2014 was up 1.81%.

An account that started the year with equal amounts invested in the four team members’ portfolios would be up 1.20%.

At the top level, the market beat the team by a little for the first quarter. But, an aggressive team seeking superior returns must be allowed to take risks. If those risks result in a small degree of underperformance during a volatile quarter, it is an acceptable price to pay if the strategy plays out as we expect over a reasonable investment horizon.

Digging down one level, we see that two team members (crossy:CIAF and ahknaten:KAI) more than doubled the market’s return. In my view, this indicates that their two investment styles are working well in the current market. Kai Petainen’s quantitative investment style seems to have anticipated the market’s recent shift in focus from growth to value stocks. JetBlue (NASDAQ:JBLU) and the four other value stocks showing growth Kai discussed in a previous article should benefit as “value” oriented institutional investors attract more capital.

One team member (mkoza:TGF) outperformed the market slightly. Mike Koza, much like Warren Buffett, is a fundamental value investor who buys stocks when they are cheap and out of favor. When the cheap and out of favor stocks Mike has selected outperform the market — even by a little — it is worth noting, as it is often the first sign that the market is beginning to change its assessment of Mike’s holdings. Mike generates great returns when his stocks go from ignored and undervalued to popular and fairly (or overly) valued. I think his track record, both long-term and recent, warrants keeping him on the team.

Now comes the hard decision. We have one team member (huyehara:HMF) who significantly underperformed. Justin Uyehara’s portfolio has been hurt by his position in Nektar Therapeutics (Nasdaq:NKTR), a biotech stock which is about 11% of Justin’s portfolio and is down about 20% in the past month. This position accounts for about one-half of Justin’s loss this quarter. Generally speaking, Justin — the ultimate swing trader — quickly sells stocks that start to move against him. Nektar is unusual for Justin in that it is a long-term holding. Even after the setback this past month, Justin is still up about 23% on this position.

Digging into Nektar, there does not appear to be any company-specific news to account for the drop in value. The stock is not falling because of a failed clinical trial or an adverse FDA decision. Instead, money seems to be coming out of biotech stocks as a group.

According to Bloomberg, 7.5% of the iShares Nasdaq Biotechnology ETF (NASDAQ:IBB), the biggest biotech-focused ETF, were redeemed on April 4. When an ETF gets orders to redeem its shares, it has no choice but to sell its holdings indiscriminately across the board. When you have to sell 7.5% of a $5 billion ETF, you have to place a lot of sell orders. Many biotech names do not have a deep enough market to absorb this kind of selling without driving the price down in a big way. Kerx Pharmaceuticals (NASDAQ:KERX), one of Mike Koza’s stocks, also seems to have gotten caught in the biotech selloff. This kind of selling can create lots of buying opportunities for investors who do their own research.

When it comes to managing teams of investment masters, I’ve learned that it is best to give the people with the track records a lot of latitude to make the day-to-day decisions on what stocks to buy, when to buy them, and how much to buy. Since the loss in Nektar is not company specific, it may be short-term, and indeed may be a buying opportunity. I will let Justin make that call.

My role is to make sure that the right Masters are on the team to accomplish its objectives. In Justin’s case, the fact that he was up 61.8% last year puts the 10.01% loss last quarter in perspective. Since the team overall has lagged the market only slightly, I don’t see a need to make drastic changes, therefore I am inclined to keep Justin on the team.

The opinions expressed in these articles are general in nature and not specific to your financial situation. If you would like to discuss your financial objectives, contact Ken Kam through LinkedIn.

Disclosure: I am the portfolio manager for mutual and hedge funds advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.


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