The quarter’s most significant asset management news is that Standard and Poor’s (S&P) changed how it categorizes companies, splitting the former financials sector into the real estate and financial services sectors. The first consists almost entirely of real estate investment trusts (REITs), companies that own, and sometimes build and operate, income-producing real estate such as malls, apartments, and office buildings. Because real estate produces income, most pay high dividends. However, those dividends are taxed as ordinary income, making REITs less attractive for taxable portfolios. The new financial services sector consists primarily of banks, insurance companies, and asset managers; it is vastly larger than the new real estate sector.

In July, Danone announced that it would buy WhiteWave Foods (tkr: WWAV), a holding of ours for nearly two years, for $10.4 billion in cash. Following the announcement, the stock jumped 19% above the previous day’s closing price. We decided to lock in our gains and sold the stock.

We added United Technologies Corp.(tkr: UTX) to our industrial sector holdings. It specializes in elevator and escalator manufacturing; heating, ventilating and cooling (HVAC) and refrigeration solutions; aircraft engines, and other advanced aerospace products. Nearly half of its revenue comes from high-margin, recurring aftermarket services. The company benefits from worldwide urbanization, emerging market economic growth and commercial building development. We like its low P/E, high dividend, and stability as an established industrial company with lots of cash on hand.

We sold Varian Medical Systems (tkr: VAR) and purchased Stryker Corp. (tkr: SYK). We like Stryker specifically because it is a well-managed company that is larger, more diverse, and less volatile than Varian and it pays a dividend, whereas Varian does not. Varian’s stock price reached a five-year high after its last quarterly earnings report, which presented a good opportunity to sell it in favor of Stryker.

We sold our position in the Health Care Select Sector SPDR fund (tkr: XLV) for a position in Allergan Inc.(tkr: AGN) . The trade brings our health care subsector distribution more in line with the market by adding another big pharma name. More than 60% of Allergan’s business is in the United States, its cosmetics unit (a quarter of revenues) is a cash business, and it recently sold its generics business to focus on higher-margin drugs. The stock declined precipitously after its pending acquisition by Pfizer (tkr: PFE) fell through. We believe the market significantly undervalued the stock and that it was an opportune time to establish a position.

We sold New York Community Bancorp (tkr: NYCB) in favor of a larger bet on First Republic Bank (tkr: FRC). We think NYCB’s pending $1.9 billion acquisition of Astoria Financial Corp. (tkr: AF) is risky due to its relative size and management’s inexperience with large mergers. We thought it prudent to wait on the sidelines given the risk of another dividend cut, which would decrease the attractiveness of this high-yielding stock. First Republic’s continued success stems from asset growth— extending high-quality jumbo mortgages—the rapid expansion of its wealth management business, and synergies driven by its “relationship banking” business model.

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.