Last year was a particularly active trading year for Nelson Roberts Investment Advisors (NRIA). The metric commonly used to quantify the amount of trading that occurs in a fund is called “portfolio turnover.” Turnover is calculated by taking the dollar value of securities sold divided by the total market value of the portfolio at the beginning of the year. Expressed as a percentage, this tells us how much of the portfolio was sold over the course of a year.

A low turnover percentage equates to a longer portfolio holding period, and vice versa. For example, 20% turnover would roughly equate to an average holding period of five years, whereas a 100% turnover rate would equate to an average holding period of one year. Higher turnover of securities in a portfolio creates additional costs, such as transaction and commission costs, and may also create taxable gains for taxable portfolios.

A portion of our turnover last year was due to tax-loss selling, which helps clients avoid capital gains tax liability. In general, we try to keep turnover ratio on the low end, although we sometimes need to make larger shifts in the portfolio towards investments that we think will perform better. Phil Nelson, founder of Nelson Capital Management, often advised his staff, “Never let the tax consequences rule the investment decision.” On average, NRIA’s portfolios have a turnover ratio of about 19%, compared to last year’s ratio of 32.5%. This compares to an average turnover ratio of over 90% for actively managed mutual funds.

During the first quarter, we aligned our portfolio to match both our macroeconomic and sector-specific themes. In the macroeconomic arena, the price of oil has fallen in half and the US dollar has strengthened significantly versus most major foreign currencies. The wealth gap continues to widenas wage gains remain elusive, especially for those lower on the economic ladder. These are trends that we believe will persist; therefore, we looked for companies that would benefit in this type of environment. Michael Kors (tkr: KORS) is a luxury retail company that caters mostly to the higher-end market. Furthermore, with 80% of revenues coming from North America and a very low valuation, we think it is well-positioned for growth. We sold Methanex (tkr: MEOH), a Canadian company whose revenues are tied to the price of oil. With US fracking continuing to build supply, OPEC maintaining its high output and China showing signs of a slowing economy, we concluded that Methanex was unlikely to perform well over the next few years.

At the sector level, we brought our healthcare allocation to market weight with the additions of United Health Care (tkr: UNH) and the Healthcare SPDR exchange-traded fund (tkr: XLV). While we believe that the current astronomical level of healthcare spending will eventually need to moderate, given the glacial pace at which the government moves, we think that contraction is at least five years away. We sold Bio-Reference Labs (tkr: BRLI), which is facing high legal costs and pricing pressure. We will watch healthcare closely as the practical implications of the Affordable Care Act become clearer. In our financial sector, we sold Brown and Brown (tkr: BRO) in favor of a basket of smaller banks: First Republic Bank (tkr: FRC), Silicon Valley Financial Group (tkr: SIVB) and New York Community Bancorp (tkr: NYCB), which should benefit from lower levels of regulation compared to larger banks.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Roberts Investment Advisors, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.