Back several weeks ago in Time for Some European Equity Options we recommended moving more capital into Europe from the US. That move was due to a significant over weighting we had in the US and the new-found growth in Europe. That paired with the reduction in new potential risks in Europe call for the move where the money will be made. Time for an update on our allocations.
We are still over weight US, with 56% of our holdings here. We have 8% in Emerging Markets, and the remaining 36% in the rest of the Developed Markets. You already noticed that there is nothing in bonds. More on that in a moment…
The BTB Fund has increased its Developed Market weightings almost exclusively through European equities. As the economy recovers in Europe, we expect equities there to recover. The ECB is helping by lower interest rates making exports more profitable in Euros and easier in general.
We are also over weight in the US market in the cyclicals. Not a lot, but an extra 1-2% in Industrials, High Tech and Consumer Discretionary. We hold a similar over weighting in Health Care.
Right now, it is hard to come up with any arguments in favor of bonds. The Fed says they are going to slow their buying of Treasuries and GSE bonds. The economy is recovering albeit slowly. The yield on bonds – even intermediate bonds – is less than the yield on equities. Not a lot of reasons to buy bonds in that list…
Then there is the Oracle of Omaha commenting on bonds; “I like owning stocks. I do not like owning bonds. Now, there could be conditions under which we would own bonds. But they’re conditions far different than what exist now.” Warren Buffett was commenting on the yield and interest rate risk in the Federal Reserve QE policy.
We are currently running a short on 20 year US Treasuries and gold miners of 3% of the portfolio. When interest rates rise, and while we don’t know when, we do know they will, the dollar will also rise and gold and bonds will fall. This is not a timing, or trading, holding, this is a core position due to the belief that interest rates will only rise from here.