EFT Portfolios: NorthCoast Goes Cash


NorthCoast Asset Management reduced equity exposure in its ETF portfolios in the second quarter as markets continued to retreat from January highs.


The company trimmed its positions in high-yield municipal and corporate ETFs in favor of cash. NorthCoast has also added a mortgage-backed bond ETF to its portfolio as part of a strategy to reduce credit risk.

“We’ve seen the macroeconomic and sentiment indicators in our model weaken,” said Patrick Jamin, chief investment officer of NorthCoast. “That has caused us to increase our cash levels.”

ETF Portfolios Go To Cash

NorthCoast switched to cash as the top holding in each of its ETF portfolios in the second quarter. Portfolio cash positions ranged between 17% and 24%.

Duration risk, or the sensitivity of bond prices to changes in interest rates, was another factor that prompted NorthCoast to allocate more of its ETF holdings to cash. “Our duration model was telling us to underweight long bonds and underweight duration,” Jamin said.

“In this environment, we perceived that more rate hikes and more rate hike surprises were likely to occur and that we should be in more cash-like instruments,” he added.

During the second quarter, NorthCoast reduced its stake in VanEck High Yield Muni (HYD) and iShares Interest Rate Hedged High Yield Bond (HYGH). Shares of HYD and HYGH have fallen 15.1% and 7.3% so far this year.

“We’ve reduced credit risk wherever it comes from, whether it’s municipalities or business,” Jamin said. “We considered that the risk of potential defaults was likely to be perceived to be higher than before. Riskier assets were therefore likely to pull back.”

Mortgage bonds

Jamin sees the promise in mortgage-backed bond funds. Over the past few weeks, NorthCoast has added to its positions in iShares MBS (MBB).

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“Credit risk is lower — based on implicit government guarantees — for mortgage-backed securities,” Jamin said. “We were underweight MBB earlier this year, until June.”

But that changed and NorthCoast reduced its underweight position. “After a lot of fixed income had pulled back, we thought this was one of the first places we could start to increase our allocation to cash and cash-equivalents,” he said. . And, “With a sharp rise in mortgage rates and the five-year Treasury yield, we believe most of the negative fixed income news is behind us.”

ETF portfolios: the S&P 500 ETF encounters headwinds

iShares Core S&P 500 (IVV) ended the second quarter among NorthCoast’s top equity ETFs. However, the company reduced its holdings in the fund during the quarter as several indicators deteriorated.

“We are looking at a cleaner approach housing sector cooling“, Jamin said. “We have seen some retail sales decline. Customer sentiment is starting to sour.” IVV is down 17.8% year-to-date.

Jamin added: “On the slightly positive side, equity valuations are becoming more attractive, but we need to see inflation cool down and show some deceleration” before equities benefit.

NorthCoast is starting to see a rise in Chinese stocks. The company holds shares in iShares Core MSCI Emerging Markets (IEMG), which holds 30% of its stakes in Chinese companies.

“We are slightly overweight in Chinese equities,” Jamin said. However, “we see that the Covid drag is starting to fade in China” and mobility is improving.

“We also expect China to have some leeway to stimulate its economy,” he said. And he also says that some of the “regulatory pressures on technology in the country have started to ease.”

NorthCoast Data


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