Caledonia Wealth Management

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SeekIng Alpha (SA): In your portfolios currently, how are you allocating among different asset classes?

David McMillan (DM): At the beginning of 2009 our biggest concerns came from a number of directions. We wanted to ensure that if the declines of the previous year continued we would be protected on the downside from further drops in portfolio values. We also needed to ensure that if we saw a dramatic recovery we could participate and generate respectable returns. It was the classic problem of trying to have low risk with solid growth, and in one of the most challenging economic periods of our time. As active managers, it wasn’t enough for us to sit on the sidelines and hope that a recovery would erase some of the losses that 2008 delivered. This led to holding a diverse mix, heavily weighted in fixed income investing, including treasuries, inflation protected bonds, corporate bonds, international bond funds, high yield bonds, commodities, and limited number of domestic and international equities (particularly in the green and clean technology areas). This saw us outperform our market benchmarks with lower risk levels. We had seen numerous opportunities within the fixed income space, and they didn’t fail to deliver. Even the higher risk fixed income investments were more attractive than most equity positions from a risk-return standpoint.

Disclosure:  Caledonia and/or its principals currently hold(s) position(s) in TBT

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With 2010 now officially upon us, we turn our attention to what the rest of the year has in store for us.  The investment world has been full of surprises over the past 12 months and it will be interesting to see how things unfold over the remainder of the year.  One thing can be certain, this will be no ordinary year, and it is our bet that we will see the making of some dramatic economic shifts that will require very careful planning to avoid significant portfolio shocks.  Here is the rundown of some of the key areas we will be watching closely.

Interest rate hike:

While there is still a lot of debate (and outright arguing) by the deflation vs inflation camps, it seems that we are seeing more of a swing toward at least one interest rate raise coming during 2010.  The overzealous stock market recovery, a likely (though small) improvement in unemployment numbers, commodity appreciation and a very real need for the government to inflate its way out of the enormous debt burden will all be drivers.

For reference, here is a chart that shows the historical Fed Funds rate since the 1950s and how infrequent the periods of ultra low effective rates are. Read more…

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