By Mark Bern, CFA
First, I want to disclose a relationship that I have with
another firm, Friedrich Global Research (FGR).
FGR runs a subscription service in the Marketplace on Seeking
Alpha. In it we have developed model
portfolios for our subscribers similar to what I plan to develop for clients of
Bern Factor. FGR uses the Friedrich
algorithm to make stock selections, primarily for potential growth, based upon
analysis of free cash flow.
Next I want to illustrate why selectivity is so important to
investor success. While this week has
been a roller coaster for equity investors, those who are investing with the
Friedrich algorithm are happy. The two
main model portfolios, the Friedrich Final Four and the Chicago Bulls Aggressive
Growth, have outperformed their respective benchmark (NYSE Composite Index,
NYA) and the S&P 500 Index since their inceptions. Their performance is charted below (our model
portfolios are represented by the red lines):
The Bulls model portfolio was only partially invested (about
34% in cash) until early December 2017 at which time we increased the equity
holdings to 100%. The Final Four
Portfolio was only 100% invested for a short time as one of its components was
acquired which put the portfolio at 17% in cash, but it is still outperforming
by just about any measure.
The Friedrich Final Four model portfolio inception occurred
on August 7, 2017 and it has returned 64.22% since. YTD (year-to-date) is has gained 37.86%. The S&P 500 Index has returned 11.12% and
3.96% for those period, respectively. In
the last week the Final Four model portfolio was up 1.75% while the S&P 500
was down -0.92%.
The Chicago Bulls model portfolio has gained 34.72% since
its inception on December 8, 2016 and 14.7% YTD in 2018. The S&P 500 Index gained 22.99% and 3.96%
for those same periods, respectfully.
The reason I included the information on
the FGR model portfolios above is because Bern Factor LLC is developing similar
portfolio that will soon be available for direct investment online for those
who are looking for a simpler way to invest and yet receive quality active
portfolio management tailored to your needs.
The Bern Factor Model
Portfolios
We have plans to launch four model portfolios between now
and mid August of this year. The first
will be an index-like portfolio already constructed and about to go live,
hopefully this coming week barring any unforeseen delays, on the foliofn.com
platform. It will be the Friedrich 150
as described below:
The Friedrich 150
folio active index is designed to compete with the S&P 500 Index with the
Friedrich algorithm select one domestic company from each of the 150 industries
that it projects to offer the greatest potential for growth. The Friedrich 150 folio active index will be
monitored regularly the highest potential quality per industry. Turnover is
expected to be very low. The portfolio
strives for better diversification and high overall quality of its
components. The minimum initial
investment is $25,000. Additional
periodic investments to the same account can be as low as $50. The fund will remain 100% invested in
equities.
The goal for the Friedrich 150 is to provide better
diversification combined with higher overall quality than other index funds or
portfolios currently available. We want
(like everyone else on the planet) to consistently outperform the S&P 500
Index (SPY). The portfolio will be
reassessed and reconstituted once per year with a minimum number of changes
driven only by changes in leadership and value by industry according to the
Friedrich algorithm. We believe that our
performance, over the long run, should add two to three percent a year on
average relative to SPY. Of course,
there are never any guarantees in investing, especially in equities, but
focusing on the quality of cash flows we believe we have a distinct advantage.
The Bern Factor 50
folio will be comprised of the 50 positions comprised primarily of the best
companies that trade on the U.S. stock exchanges, regardless of industry,
offering the best value relative to growth prospects. This portfolio will be
actively managed and may reallocate to cash, bonds or other hedges when
management deems necessary to conserve principal. The focus on this portfolio will be growth
through appreciation. Additions and
deletions will be relatively few throughout the year though we will reassess
the components monthly. Changes will
occur only when the portfolio management determines that the growth potential
of the portfolio can be improved.
This folio will most resemble in makeup and principle the
Chicago Bulls model portfolio. Of
course, there will always be differences since the Bern Factor 50 will be
invested in a pre-specified number of positions and will have greater latitude
in allocation across asset classes; plus the best companies available at any
given time will change depending on prices levels relative to the underlying
inherent value of each equity being considered for inclusion.
The Bern Factor
Focused Growth folio will be more concentrated in fewer equity holdings to
provided maximum appreciation potential.
Each position will be reassessed on a monthly basis. Only those equities of the highest quality
with the greatest potential for growth with bargain prices will be added to
this folio. The folio will continue to
hold positions for the long term until either a negative catalyst occurs or the
stock price becomes extremely overvalued.
We expect to hold between 12 and 24 positions at any given time but the
number of positions may be lower whenever there are not enough stocks available
that meet our stringent criteria.
Turnover is expected to be very low.
We will be evaluating the entire universe of exchange-traded
stocks on the NYSE and NASDAQ exchanges regularly to identify companies to
include. We will be considering every
stock (about 4,000 including ADRs, American Depositary Receipts or foreign
stocks traded on U.S. exchanges) based upon its potential and consistency of
results. We maintain a database of all stocks (all
those that report enough data) with monthly updates that enables us to screen
according to our own proprietary ratios and metrics.
The Bern Factor
Growth and Income folio will consistent of at least 32 positions, primarily
common stocks with a long history of rising dividends, preferred stocks with
above average growth prospects, corporate bonds, treasury bonds, and cash. Allocations will be determined by Bern Factor
in an effort to capture an above average risk-adjusted yield with an emphasis
on capital preservation. The folio will
be actively managed but turnover is expected to be relatively low.
The Bern Factor Growth and Income folio will be designed
with the intent to provide a yield consistently higher than that of the major
Indices with a better risk-adjusted total return potential. It will used the Friedrich algorithm, as will
all our portfolios, as a guide to identify potential value and growth potential
within the universe of stocks that consistently provide higher and/or rising
dividends. Our goal is to provide a
higher future yield on invested capital for those investors with a more
conservative viewpoint toward investing.
What is a folio?
A folio is a group of stocks (generally called a portfolio)
that can be bought or sold together rather than individually. When an investor invests into one or more
folios s/he will be buying shares in each of the stocks held by the folio. Our platform supports fractional share
purchases and holdings, so you never need to try to determine how many shares
to buy of each company. Folio does all
that for you and allows you to buy any dollar amount (above minimums) and have
that investment allocated across the folio holdings according to the
predetermined allocation model developed by the portfolio manager. All transaction costs are included in the
management fee.
Portfolio management fees (inclusive) for Bern Factor LLC
will be as follows:
Minimum initial investment of $25,000
From $25,000 to $499,999 1.00%
of total account assets
$500,000 and Over 0.75%
of total account assets (inclusive)
By inclusive we mean that once an account has assets of
$500,000 or more the management fee on the entire balance will be 0.75%. The 1.00% management fee only applies to
accounts below $500,000 in total assets.
I also want to point out that when an investor sells all or
a portion of his/her assets in a folio s/he will need to report all the
individual transaction gains and losses when filing taxes. Fortunately, if you (or your tax preparer)
uses tax preparation software, all the forms can be downloaded already filled
out from foliofn.com directly into the software with just a click of a
button. If you do not use tax preparation
software, please consider it for taxable accounts. This, of course, in of no concern for
tax-deferred accounts.
In addition to the folios being rolled out we are also
preparing a robo advisory service based upon our portfolios. What this means is that an investor will be
able to do everything online, from contracts to receiving information about our
company and advisors to investing in our portfolios. Our robo advisory systems will automatically recommend
an allocation between the portfolios we offer that you can either accept or
adjust to meet your personal needs.
We will, of course, also offer personalized portfolio
management services for accounts in excess of $100,000 in assets to be
invested.
We apologize for the commercial nature of the letter this
week but thought it better to do a relatively detailed explanation this one
time as opposed to shorter, ad-like paragraphs every week. We will announce the launch of each folio and
the robo advisory services as each becomes available.
Respectfully,
Mark Bern, CFA
Bern Factor LLC
700 Chinquapin Drive
Lynhurst, VA 22952
540-941-3582
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