Forget Bernanke, Invest Alongside His Likely Successor

Editor’s note: This is an updated version of an article first published Aug. 22, 2013.

At StreetAuthority, we often look at where Washington’s most powerful men are putting their money. Recently, we learned what not to do from Barack Obama’s portfolio, picked up some tips on diversification from Mitt Romney and revealed Ron Paul’s affinity for gold and silver miners.

But none of these men have the potential clout of a woman who may soon become the world’s most powerful economic force. 

If you’re thinking of Hillary Clinton, Marissa Mayer or Angela Merkel, you’re wrong. 

As the first chairwoman of the Federal Reserve, Janet Yellen would have a deciding role in determining the monetary policy of the world’s largest economy and her portfolio holds some interesting stocks.

I know, Yellen has yet to be approved by Congress, but she has some important qualifications:#-ad_banner-#

First, Yellen has been on the Fed’s Board of Governors for a full economic cycle, and she’s been there for the discussions on an unprecedented monetary policy. Obama needs that kind of institutional knowledge to help guide policy coming out of this historic period. Second, Yellen is much more dovish than any other possible pick, helping to assure the president that monetary policy will remain accommodative as long as necessary — especially if Congress can’t pass a responsible fiscal package.

In addition to her work at the Fed, Yellen has taught at Harvard University and the University of California at Berkley. She was the president of the San Francisco Fed from 2004 until 2010, when Obama nominated her to the Fed’s Board of Governors.

So what can we learn from her investing style (insofar as she has one)?

Most of her assets are held in a living trust held jointly with her husband, the Nobel Prize-winning economist George Akerlof. (The fact that assets are held in a trust means little other than that the estate will not go through probate to heirs.) Of Yellen’s estimated net worth of $3.5 million to $7.5 million, the largest portion is held in a diversified mix of Fidelity and Vanguard funds. She also has a considerable amount in Berkley’s defined contribution program along with retirement benefits she is currently receiving.

Yellen’s Top Stock Picks
Most interesting in the most recent financial disclosure is her holding of individual stocks. While Yellen holds an extremely large and diversified portfolio through funds, she holds direct equity positions in fewer than 10 individual companies. Her individual holdings are an odd mix of energy, industrials, consumer discretionary, technology and defense. Yellen’s portfolio is also heavily weighted for a cash return, with her three largest holdings paying an average 3.5% dividend yield.

Her largest holding is as much as $100,000 in shares of ConocoPhillips (NYSE: COP), the world’s largest exploration and production company, with a market cap of $80 billion. Lately, investors have feared that ConocoPhillips will have a tough time paying for its strong 4.1% dividend from cash flow as the company increases its capital expenditures for Canadian heavy oil and offshore projects. These large projects should start adding significantly to production and requiring less capital spending after 2014, giving the company a huge boost to cash flow.

  Wikipedia/Federal Reserve
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Yellen’s next two largest holdings are in the $53 billion chemicals maker DuPont (NYSE: DD) and the $187 billion pharmaceutical behemoth Pfizer (NYSE: PFE). Her share in the two companies is estimated at upward of $50,000 each. DuPont’s management recently announced its intent for a full or partial sale of the performance chemicals division. That division saw sales decline 7.8% last year (compared with a much smaller decline of 3% in overall sales), so management may be trying to cut a weakening division before it gets any worse.

Pfizer has been in a tough spot lately as generic drugs erode sales for some of its older blockbuster drugs like Lipitor, Xalatan and Detrol. The company said last month that it would separate into three internal business segments: mature drugs, drugs with long-term patents, and vaccines, oncology agents and consumer health products. While the separation could give investors more transparency, it is unlikely to boost profitability. Regardless, Pfizer is considered best in class for the breadth and depth of products, and the company has seen sales grow at a compound annual rate of 4% over the past five years, more than enough to support the 3.4% dividend yield.

Yellen also holds smaller stakes (up to $15,000 each) in specialty chemicals manufacturer Cytec Industries (NYSE: CYT), digital TV distributor DirecTV (Nasdaq: DTV), defense contractor Raytheon (NYSE: RTN) and business electronics provider NCR (NYSE: NCR). Her position in Raytheon is probably the most controversial, given its ties to defense spending, but the stock pays a 2.9% dividend and has been a solid performer over the past five years.

A weighted average of the seven stocks has easily beaten a portfolio of stocks in the S&P 500 since the market trough, with runaway leaders like the 639% return on Cytec Industries and the 455% return on NCR. Only Raytheon underperformed the general market, with a 159% return compared with 168% for the S&P 500.

Risks to Consider: Yellen’s financial disclosure offers an interesting look into her investments but does not show why she chose individual positions. As an economist, she may be betting more on the future of the particular industries rather than the companies themselves. Investors need to develop their own outlook for the individual companies and industries in their portfolio.

Action to Take –> I use a similar strategy in my own portfolio, a diversified mix of funds with smaller positions in individual picks. This so-called core-satellite strategy is a popular and effective way to get market returns from the majority of your portfolio while still benefiting from the success of a few individual companies.

P.S. — You don’t have to be the heir apparent to Ben Bernanke to know which stocks to buy. In fact, our report, The Top 10 Stocks for 2014 tells you exactly which investments are most likely to outperform in the coming year. In fact, they’ve nearly tripled the market’s return, delivering an average 129.5% gain over the past five years. To learn more about these stocks — including some of their names and ticker symbols — click here.