All,
Many thanks for all your feedback regarding my proposed portfolio allocation that I submitted under an earlier post. The purpose of this post is to publish a revised allocation and solicit your constructive feedback. Thank you in advance for your assistance.
Full disclosure: From the mid 90's until 2007 my investing style was your classic "boglehead" index investor and abandoned that strategy at the absolute wrong time. Lesson learned. While the past 5 years have been kind to long biased stock and bond investors it is my opinion that the next 5 years will not be so kind. Therefore I am structuring a portfolio that I hope will smooth out the volatility and allow me to stay the course. Fire away with your comments!!!!
Global Asset Allocators:
15%- Wells Fargo Advantage Absolute Return (GMO), WABIX
10%- FPA Crescent, FPACX
10%- First Eagle, SGENX
Core Stock:
5%- Seafarer Overseas Growth & Income, SFGIX
0%- Yacktman Focused, YAFFX
Tactical/ Long-Short:
12.5%- Good Harbor US Tactical Core, GHUIX
7.5%- AQR Managed Futures, AQMIX
Bonds- Flexible
7.5%- Doubleline Total Return, DBLTX
7.5%- Osterweis Strategic Income, OSTIX
7.5%- Templeton Global Total Return, TTRZX
17.5%-FPA New Income, FPNIX
Note: I'm using FPA New Income for cash reserves and my plan is to add to core stock positions during market declines. I'm also interested in learning more about the new RiverPark Strategic Income fund and may add that.
Thanks!
Heather
Comments
Regards,
Ted
Hi Max,
Sorry for the confusion. I have updated the post to add the fund symbol for FPA New Income. I'm not allocating anything to Yacktman today as I believe US stocks at a Shiller P/E of 23-24 are too frothy at the moment. Plan to add later and keep funds at 10-11.
......Sorry. There must come a moment when you just DO this, and trust your own decision.
Max- gosh no. Would never pay a load. All of the funds listed are available without a load at Schwab Institutional. FYI
First, I want to commend you on your openness and your flexibility. I would never reveal my entire portfolio to strangers, especially on the Internet. I congratulate you on your flexibility with regard to portfolio modifications based on MFO membership counsel. I would caution you not to weight these recommendations equally; the various sources are not equally informed.
Second, I have and will continue to abstain from offering specific portfolio holding advise. MFO is populated by folks who have done much more research, are much more diligent, and are much more talented in this arena than I am. So I gladly pass the baton to them.
However, lastly, I am perplexed by your decision to fully embrace active fund management given your untimely conversion just before the 2008 market meltdown and your current projections of likely muted intermediate-term market returns. If I did share those judgments (I do to some extent), I might be disposed to reconvert towards a more passive mutual fund management policy. Here’s why.
You anticipate a more challenging, overall lower returns, equity market environment for the next few years. So do I. If your forecast is accurate, lower annual rewards means that more attention should be given to control costs.
If the market is expected to deliver a 10 % annual rate, a fee structure of 1.5 % is more acceptable than if the expected annual return is merely 5 %. Imagine if the equity marketplace only returned 1 % annually for the next 5 years. The active management fee would put you into negative territory.
Active funds must generate excess returns of about 1.5 % to just recover their fees over passive products. That’s a high hurdle that very few active managers can jump. The historical data is solidly against them. It is true that they are likely superior stock pickers, but not enough so to compensate for the frictional trading, research, and management cost drag. The database supports my assertion.
On a semi-annual basis, Standard and Poors’ SPIVA scorecard and persistency studies clearly demonstrate that active mutual fund managers struggle to simply duplicate appropriate benchmarks and statistically fail moderate term persistency tests. Finding managers who can accomplish both tasks are rare, like in the 2 % likelihood range. It can be done, but the odds are slim.
Given lower annual return expectations, the risk/reward tradeoff seems to balance more heavily towards a passive investment program.
Your personal experience with respect to abandoning the passive ship just before the equity markets floundered on the 2008 rocks would have made me very leery about active management.
One myth is that active management presciently avoids market crashes; yet another myth is that active management consistently minimizes losses during market downturns. These claims are without merit. The empirical evidence to support these self-serving aggrandizements is absent. Your anecdotal evidence seems to strengthen my lack of evidence contention.
So, given your forecasted lower market returns and your experiences, I’m puzzled by your commitment to active mutual funds at this juncture. Given these same conditions, I might seriously be considering refitting my portfolio in the direction of an passively managed program. I acknowledge that our differing interpretations and reactions to the dynamic marketplace are what make for an efficient market pricing mechanism in the end.
Regardless, I wish you well in your realignment project. I’m sure the many fine MFO member recommendations will contribute to your final portfolio reallocation decision.
Best Regards.
You have categories called global asset allocators and tactile long/short. I just lump that together and call it balanced and alternative strategies. But it's similar in that we want good managers to have a lot of investment flexibility, geographically and with asset allocation.
You, 55% in:
WABIX, FPACX, SGENX, GHUIX, AQMIX
me, 40% in
FPACX, FAAFX, MACSX, PAUIX, RGHVX
Then we have your more conventional equity/bond mix.
you 50/50 mix, YAFFX, SFGIX / DBLTX, OSTIX, TTRZX, FPNIX
me 60/40 mix, YAFFX, ARIVX, GPGOX, OAKIX, ODVYX / MWTRX, LSBRX, PRWBX, FGBRX
I will say, I keep ~10% out of this "core" part of the portfolio to move around with the hopes of adding alpha. Not sure I really do.
So, can't argue with your portfolio structure, but, I'll give my 2cents on other stuff. I don't know much about some of your flexible allocation funds, but I do think you have way to much allocated to them. I can see where you are coming from - trying to reduce volatility, but 55% of the portfolio? I'd knock that back to maybe 30% with FPACX, WABIX and one other. I might then go with 50% in stock funds and 20% in bond funds. There are some real good capital-preservation equity managers listed on this sight to chose from - or even index funds to fill some of the large cap equity portion. Re-evaluate in 10 years and bring it closer to a 60:40 or 50:50 mix down the road if you like.
Anyway, I like what you did and I guess you have to go with your gut on risk versus reward. But keep in mind, like others have said, volatility is not the same as risk over a long investment horizon (by the way, I do equate volatility to risk for shorter horizons).
Good luck and nice job.
I also believe that we'll see smaller returns going forward, but I don't think that implies we should move to passive management. After all, whatever the market returns, active management as a whole can only return the market's return minus all their expenses. This is the case whether we're in a bull or a bear market. However, no one can invest by way of "active management" as a whole, we can only invest by way of particular active managers (for that matter, you can't invest by way of "passive management" really, you have to choose some particular and limited indexes, but at least for that you can come close and get very broad coverage).
A crucial point to remember is that those low future returns we're expecting are going to be lumpy, i.e., they're going to be the product of some really lousy stretches dragging down more normal stretches. Now I don't know if there are academic studies for this, but my guess is that, while an active manager's outperformance of an index isn't predictive of that manager's future outperformance, it seems very likely that a manager's past outperformance IN A MAJOR BEAR MARKET is likely very predictive of future outperformance in future bear markets. I'd say that this is because his previous outperformance during major downdrafts is likely the result of his style of managing. I think it's a very good sign to hear a manager say that he considers himself to be "managing risk" first and foremost.
Of course there are various ways of managing risk: going to cash, investing in low beta stocks, quality stocks, a defensive use of options, I'm sure there are a million methods. One thing all of these methods tend to do is hold you back during bull runs, but I seem to recall Benjamin Graham saying something to the effect that he was seeking 'satisfactory returns' together with his famous "margin of safety". If you're the type who's likely to throw a fit if a fund is providing decent returns during a bull market without actually keeping up with the indexes, I'm sure that such defensive funds aren't for you, and if you do find yourself in one of them you're likely to bail at just the wrong time (after a strong run when they've almost certainly underperformed). However, if you're expecting smaller future returns on the basis of some serious bear panics, then I think the one way to outperform in the future is to seek out those who have proven themselves capable of surviving bear panics in the past. There's plenty of reason to believe that their experience will hold them in good stead.
Personally I wouldn't touch a fund that didn't seriously outperform its category in 2008 (well, maybe if they've since changed strategies), and in general, any fund that you might expect to 'shoot the lights out' in a bull market is a fund to avoid right now. I mean, collect 10 or so funds like TBGVX, PVFIX, VDIGX and the like and you can't conclude that you would outperform in a bull market (you'd probably trail) but who really doubts that you'd outperform a bear that dropped 35% of its value?
Anyway, maybe that's some food for thought.
Stan
Hi Stan,
Bull markets or Bear markets, it doesn’t matter. In a comparison against passive Index funds, active fund managers underperform regardless of the market direction.
It is usually acknowledged that the active mutual funds deliver sub-par returns during a Bull market because of the cash they must withhold in reserve for redemptions and the relentless impact of costs. It is a myth that they protect their clients better in a Bear market environment. The accumulated data studies verify this factoid.
A Vanguard Investment Perspectives observed that active management was ineffective during Bear markets. Here is a Link to that study:
https://institutional.vanguard.com/iam/pdf/VIPSS09.pdf
Vanguard concluded that: “We find little evidence to support the purported benefits of active management during periods of market stress.”
Standard and Poors’ also completed an active fund management performance study. S&P reported the following findings: “….the majority of active funds in eight of the nine domestic equity style boxes were outperformed by indexes in the negative markets of 2008.” It also noted the results were similar during the bear market of 2000-02.
Findings like these simply explode the myth of superior active management in Bear markets. It just doesn’t happen all that often.
Here’s another Link to a Vanguard study that examined the same period covered by S&P with similar conclusions:
http://atlantawealthconsultants.com/wp-content/uploads/ActivePassiveBear.pdf
As John Bogle is fond of saying: “The more the managers take, the less the investors make”.
Even if a manager is successful for a period, eventually persistency failure erodes any momentary excess profits. Yesterday’s winners follow a regression-to-the-mean trajectory and become tomorrow’s losers. One predictable constant is high active management fees. That was the primary focus of my posting to Heather.
Thank you for your comments. You are forever free to navigate the upcoming markets with whatever compass you choose. I wish both you and Heather well. There will always be some active fund managers who beat their passive benchmarks, but persistency is a major shortcoming. Good luck.
Best Regards.
In particular, I think you are light on the equity side. You are trying to cover that using balanced/asset allocators. But, most of your stock allocation is large caps and your international coverage is lacking broad international both large and small caps. Personally I would get rid of your tactical allocation sleeve. You are likely to get disappointing results at the time you expect them to protect you.
You are waiting for Shiller P/E to drop to 10s to invest. It is possible you will be stuck waiting for it for a long time. People sat the whole bull market. It is a poor timing indicator for the day. It is a hugely lagging indicator. Good luck.
Try to construct a more conventional portfolio, be patient and avoid gimmicky funds at least keep such funds to a small percentage of your portfolio.
Keep Calm
And
Invest!
I love it.
Here are the lifetime risk/return numbers for the funds in Heather's modified portfolio:
I left off the load for SGENX.
To get more direct comparison over consistent periods, here's how they stack in the MFO rating system:
Results through June 2013. Oldest share class only. GHUIX not included, since less than one year old. The ratings reflect front-loads, so if you really are getting SGENX for no load but at same ER, it's probably being underrated by the system, sorry. (I'm hopelessly predisposed against front-loads.)
I've included some reference/index funds for comparison - a Snowballism, which is actually being incorporated into the printout of the searchable MFO ratings.
My 401k is invested in 3 funds: total US stock market index, total international index and short term bond index. I totally understand global asset class diversification. How did that fare in 2008? How will it fare during the next recession?
The Good Harbor fund is based on sound empirical research and I'm quite comfortable with it. I also like to balance value oriented asset Allocators with momentum like investments such as managed futures.
However, the best risk reward opportunity is in direct lending funds like peer to peer consumer debt, first deed and small biz loans.
I agree that my allocation needs more international exposure and thus plan to add to Seafarer and FMI International since Artisan is closed. Also like FPA Int Value but prefer to diversify firms since I already own Crescent.
Take a look at the risk return of my portfolio as posted by Charles