The "Businessman's Risk" Portfolio

Earlier today we highlighted market strategist Jeff Saut's thinking that it may be time to rebalance portfolios. Within his commentary, he laid out a theoretical asset allocation as to how he would structure a "businessman's risk" portfolio. When Saut first entered the industry 40 years ago, his mentor told him to allocate 20% of money to Treasuries, 20% to stocks, 20% to bonds, 20% into precious metals, and 20% into real estate. Saut did not heed this advice though admits that over the long haul it has performed decently. Instead, Saut has constructed the aptly named "businessman's risk" portfolio which is more to his liking. Here's the breakdown:

50% Equities: For this portion of the portfolio, Saut favors emerging and frontier markets to developed markets. He targets international exposure using the MFS International Diversification Fund (MDIDX). For your US exposure, he feels large/mid caps are preferred over small caps and to favor growth over value.

15% Fixed Income: In this asset class, he prefers U.S. over non-U.S. exposure and corporates over treasuries. He recommends funds like Putnam's Diversified Income Fund (PDINX) for this allocation.

15% Cash: While this part of the portfolio is very low yield, it is a "safe place to wait for risk aversion to abate."

10% Commodities: He fancies an allocation to precious/base metals, soft commodities, and crude oil. For precious metals he likes the OCM Gold Fund (OCMGX) managed by Greg Orrell.

10% Alternative Investments: He utilizes this asset class purely for diversification purposes. This category encompasses numerous options ranging from real estate to private equity to managed futures. There are a myriad of ways to gain exposure and some ideas can be found in our hedge fund portfolio tracking series.

So there you have the "businessman's risk" portfolio. Keep in mind that this allocation doesn't seem to take into consideration age, retirement horizon, or other factors. Instead, it serves as a generic template for those willing to take on some risk. Determining and managing your risk tolerance is a very important aspect of portfolio management and you can view Jeff Saut's risk management principles for more on the subject. The portfolio above is certainly more risk tolerant, hence its name: the "businessman's risk" portfolio. Below is a graphic breakdown of Saut's favored asset allocation:

(click to enlarge)

For more from the market strategist head to his recent notion that it is time to rebalance portfolios.

Jeff Saut: Risk Adjusted Stock Selection & Risk Management Are Keys to Portfolio Success in 2010

Raymond James' Chief Investment Strategist Jeff Saut has penned his weekly market commentary and in it he examins the possibility of the dreaded double-dip recession. Many economists argue that the recession ended around this time last year. Saut proceeds to examine the possibility that these economists are wrong in an effort to gauge the possible worst case scenario. He outlines the fact that 3 out of 38 recessions have qualified as double-dips since 1880. In practically all of those cases, the first recession was 'mild' and then the double-dip was quite harsh. Saut argues that we aren't in for the dreaded DD because the recession we just experienced was anything but mild.

Pursuant to his take on the markets, Saut is not bearish, but he is quite cautious. Last week, he pointed out that there were so many negative indicators that he wouldn't be surprised to see a contrarian stock market bounce. And, that's exactly what happened. You have to hand it to the market strategist as he's correctly removed his market hedges into the turmoil and then correctly called the rally. So, where does he stand now? Since that transgression of events, he has reverted back to his cautious stance for the intermediate term. He thinks any pullback will be contained in the 1040-1050 zone on the S&P 500.

In order to find success in these cautionary times, Saut points to risk adjusted stock selection and risk management as the keys to portfolio success. This is interesting because Lee Ainslie of hedge fund Maverick Capital previously opined that 2010 would be a stockpicker's market. Yet, when you examine the performance of many long/short equity hedge funds, that doesn't seem to be the case at all. Maybe 2010 is truly setting apart the best stockpickers from the rest of the pack. While 2010 has been rough on many big name investors, Abnormal Returns has dubbed the next decade the forthcoming golden age of stockpicking. In the near-term, Saut agrees that stockpicking is key.

A few weeks ago, Saut advised investors to protect gains from the March 2009 rally and his stance remains unchanged there. To help investors with their stockpicking prowess, he has recommended a few names: Microsoft (MSFT), Intel (INTC), Enterprise Product Partners (EPD), Allstate (ALL) and Walmart (WMT).

Specifically on Microsoft, Saut highlights its $3.50 per share in cash, 2% dividend yield, and cheap valuation. Regarding Walmart, he thinks its valuation is low here and sees the company growing revenues in the high single digits and buying back a lot of shares. Lastly, Saut puts in a plug for Putnam's Diversified Income Fund (PDINX) as it has the possibility to generate equity-like returns without the same risk profile as equities. Embedded below is Jeff Saut's entire investment strategy piece for this week:



You can download a .pdf copy here.

Overall, Saut remains cautious longer term. He currently favors growth over value stocks and has highlighted numerous technology sector names in his missives. While he thinks the selling will be contained near-term in the market, he points out the S&P 500's 50 day moving average as a key level of resistance at around 1,100. For more on Saut's market rationale, head to his commentary where he outlined his decisively cautious stance.