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Comparing Portfolio Performance (1973 To 2015)

I’ve finally managed to gather enough portfolio performance data to put together this year’s portfolio comparison edition. I was able to add 2014 and 2015 data. Last year’s post is here . You can use last year’s post and the Portfolios page for portfolio definitions. I’ll present the comparison of the portfolios in a few ways. I also added a few new fields this year. I added the last 3-yr, 5-yr, and 10-yr performance for each portfolio and performance in the last bull market and last bull/bear market cycle. Now, on to the data. First, let’s present the data in its most traditional way, by sorting the portfolios in terms of performance over the full time period, 1973 through 2015. There is a lot of data in these images so click on the image to make it easier to see. Click to enlarge A few notes on this presentation. Performance, CAGR, is highlighted in light orange. The most common, ‘traditional’ benchmarks, are highlighted in light blue. The portfolios in yellow are some of the popular buy and hold allocations where I had to create or simulate the last 2 years of performance data based on their allocations. This method is pretty accurate since they’re passive portfolios but still the data is not exact and does not come from a standard source. So, what’s the main message here? Quant and TAA portfolios provide the highest performance over the entire time period. The Bernstein portfolio is the highest ranked buy and hold portfolio on the list at #12. Now on to risk-adjusted performance. Risk-adjusted performance is a much better metric in choosing portfolios. Here I present the portfolios sorted by the Sortino ratio, which doesn’t penalize portfolios for upside volatility, instead of the more traditional Sharpe ratio. Click to enlarge In risk-adjusted terms, quant and TAA portfolios are also at the top of the list. The highest ranked buy and hold portfolio is the Risk Parity portfolio at #9. Risk-adjusted metrics like the Sortino ratio are particularly important for investors in the withdrawal stage of their life. Higher risk-adjusted returns is highly correlated with higher SWRs in retirement. Great, but many investors ask, ‘what have you done for me lately’? Maybe markets have changed, maybe what worked in the past doesn’t work anymore, etc… Many investors use recent performance, especially since the start of the most recent bull market in 2009 to make portfolio comparisons. This is a mistake. You should at least look at the most recent bull/bear market cycle in addition to the full history. Below are the portfolios sorted by performance since the start of the last, in this case, the bear/bull cycle, which started in 2007. Click to enlarge Nothing surprising or new here. Quant and TAA portfolios have led the pack in the last full market cycle. The highest performing buy and hold portfolio, the 70/30 US stock bind portfolio, comes in at #9 with the vast outperformance of US markets over pretty much anything else in that time. There you go. Tons of data to make all kinds of comparisons. Go crazy. These are my favorite 3 ways to look at portfolio performance.

How To Destroy Your Net Net Stock Portfolio

Are you tired of building wealth? Would you rather watch your money burn? One of Canada’s leading newspapers came out in 2013 with a list of net net stocks that it expected would produce amazing returns. Author Robert Tattersall, co-founder of the Saxon family of mutual funds, looked back in time and put together a basket of net nets trading on the Canadian markets at the start of 2012. His strategy was simple: a basket of Canadian net nets, 21 to be exact, trading at no more than a 20% premium to NCAV, with no additional filtering. Over 2012 the stocks would have performed very well, recording an 18% gain versus the TSX’s 4% return. That result is on par with the returns of net net stocks generally. Over 2013, however, returns began to sour. Rather than the market crushing performance of the previous year, Tattersall’s basket of net nets actually underperformed the market, returning just 2% compared to the market’s 7.2% return. What Went Wrong? Part of the problem was the holding period. Net nets show their best yearly performance as a group over a 1 year holding period but then perform worse the longer you hold onto the stocks. Over a two year period, a net net stock’s CAGR drops in a meaningful way. Over a 3 year holding period, results are even lower. Returns decrease step by step until in year 5 a lot of the advantage of owning a basket of net net stocks is destroyed. If you want to run a net net stock portfolio, annual rebalancing is a must. But holding period length is not the only thing potential net net stock investors should keep in mind, and it wouldn’t have been responsible for the large drop in performance his portfolio saw. There is a fair amount of variance in portfolio returns, after all. But, astute readers will notice two other fatal flaws. It’s no secret that net nets perform spectacularly when you stick to the strategy over a long period of time. Not all net nets perform the same. I crafted my Core7 Scorecard to help identify the net nets that have a better chance of outperforming net nets in general and help avoid firms that will disappoint. While it’s impossible to avoid every firm that will produce a loss or ensure that all the highest returning net nets are in your portfolio, it does a good job of stacking the odds in your favor. One of the key requirements in my scorecard is avoiding Chinese net nets and resource exploration companies. China has become famous in the West for its spectacular growth, but it’s also developed a bit of a reputation for offering up western market listed firms that are nothing more than frauds. These companies over-inflate their Balance Sheet figures, record assets they don’t actually have, and even tally up growth in revenue or earnings that just didn’t happen. Understandably, these companies don’t make for the best net nets. After all, if you’re going to be basing your investment decisions on Balance Sheet figures, it’s usually best to stick to firms you have reasonable grounds to assume are producing accurate financial statements. Resource exploration firms are a whole other can of worms. While they may have more accurate financial statements (i.e. they’re less likely to be outright frauds), these companies have a long history of destroying shareholder wealth. They start with a public offering of stock and then spend the money trying to find resources to harvest. This process can take years, if they find anything at all, and the entire time the company keeps draining its bank account. Most companies never actually find a deposit, but do a very good job of eroding shareholder value. 9 Net Nets for 2014? Maybe? These facts aren’t exactly a secret on the Street, so it’s interesting that David Sandel of Simcoe Partners would choose to include Chinese reverse merger and resource exploration firms in his followup portfolio for 2014. Just like Tattersall’s 2012/2013 portfolio, Sandel picked a basket of net nets that he suggested investors purchase for 2014: Automodular Corp. ( OTCPK:AMZKF ) -10.16% Monument Mining Ltd. (MMTF) -41.17% Energold Drilling Corp. ( OTCPK:EGDFF ) -50% Indigo Books & Music Inc. ( OTC:IDGBF ) +46.25% Greenstar Agricultural Corp. (GRCGF) -51.17% Goodfellow Inc. ( OTC:GFELF ) +5.73% Mirasol Resources Ltd. ( OTCPK:MRZLF ) +20.44% ACE Aviation Holdings Inc. ( OTC:ACAVF ) 0% Coopers Park Corp. ( OTC:CJPKF ) +43.93% All 9 net nets were still listed on Google Finance 12 months. If equally weighted, the portfolio would have produced a loss of -4.02%. A quick look at the firms is instructive. Of the firms selected, 3 were resource exploration firms (Monument, Energold, Mirasol) and one was actually a Chinese firm (Greenstar). The return to this group of 4 stocks was an average loss of -24.38%. If investors had skipped over the resource exploration and Chinese firms, they would have enjoyed a much more rewarding +17.15% return versus the TSX’s +6.23% gain. Not exactly statistically significant, but illustrative. Wise Stock Selection for the Best Returns At this point, astute readers will point out that these exploration firms were purchased right before a big drop in commodity prices generally. That’s a fair point, and one more reason to avoid resource firms altogether unless purchased in the depths of a serious bear market. While retail and industrial firms can turn themselves around with effort, planning, and decent judgement, the fate of resource firms are more or less wedded to commodity prices. Net nets don’t work out every year, and not every company will see positive returns. Seeing losses from time to time comes with the territory when buying net nets. Still, despite the occasional loss, net nets produce better returns over the long run than any other value strategy. Returns are consistently above a 25% CAGR in academic studies and my own portfolio has done very well. You shouldn’t just buy any net net, however. Some net nets have a much greater chance of suffering large losses; while other net nets have characteristics associated with outsized returns. Most of my net nets are debt free, have been growing NCAV, are increasing earnings, were bought with a PE below 10x (less than half the market PE!) and at an average discount to NCAV of 55%. If you want to make the most of your net net stock investing, you really have to group the best possible stocks into your portfolio. Why would you do anything else? Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

4 Mutual Funds Rookies To Outperform Older Peers

According to the research paper “Scale and Skill in Active Management” by professors Robert Stambaugh and Luke Taylor, younger actively managed mutual funds outperform the older ones in a defined time frame. The path-breaking study, published last year in the Journal of Financial Economics, also indicated that returns of funds decline as they grow older. The professors cited an increase in the size of active management industry and the entry of new competitors as the main reasons behind their findings. Taylor said, “If there are more people fishing in the same pond, that’s going to make it harder for any individual person to catch a fish.” Actively managed funds tend to invest in securities that are believed to be undervalued relative to their fundamentals and try to outperform broader indexes. In order to pursue this objective, asset management companies seek to employ active managers who utilize their forecasting power and judgement to decide on buying, selling or holding securities. As a result, portfolio compositions of these funds are believed to vary according to market conditions. This makes the study an interesting reference when the performance of the younger funds is compared to the older ones. It will be interesting to see which category helps investors to achieve their objectives. Younger Versus Older Funds Out of the mutual funds we studied, funds that were incepted on or after 2010 have been considered as younger funds and those incepted on or before 2005 have been categorized as the older ones. In order to analyze the performances of younger mutual funds compared to the older ones, we have selected the top 100 funds from each category on the basis of their performance since inception. While the load-adjusted average total return of 100 younger funds since their inceptions outpaced the same average of the top 100 older funds, the former also outperformed their older peers in recent years. Load-adjusted average total return since inception of the top younger funds came in at 18% against 13.5% of the top older funds. Moreover, the younger category registered an average total return of 17.7% in the last three-year period compared to 16.4% gain witnessed by the older ones. Last year too, when most of the mutual funds found it difficult to finish in the positive territory, the top younger funds managed to post an average gain of 4.4%, clearly outpacing the average return of only 2% registered by the top older ones. Before concluding that the younger funds may prove to be more profitable than the older funds, as the facts indicate above, let’s have a look at some of the arguments given by professors Robert Stambaugh and Luke Taylor in their paper. Arguments in Favor Both Stambaugh and Taylor identified younger managers’ improving skills and ability to use advanced technology for forecasting as the main reasons for the outperformance of younger active funds. They argued that with gaining popularity of mutual funds over the years, level and quality of training has increased over time. Betterment of training helped new fund managers to gain exposure to higher education, advanced technology and research tools, which in turn had a positive impact on the performance. To quote Taylor, “New funds entering the industry have more skill … possibly because of better education or a better grasp on technology.” Moreover, younger active funds that come with new strategies, never explored earlier, may attract more investor attention than the older funds. Separately, Taylor identified that the performance of a fund tends to decline with time as the industry size increases. With time, the number of competitors and size of individual funds are bound to grow. With increasing size, trading volume of the funds also tend to rise, which weighs on a fund’s performance. In order to improve performance, the fund manager needs to increase exposure to undervalued stocks. This involves identifying stocks which are incorrectly priced relative to their intrinsic value and picking potential sellers of the same. This will force the fund to offer a higher price for the stock if it is to be purchased immediately. Otherwise, the fund may wait for a longer period of time, which may result in the loss of some of the incentives of undervalued stocks. 4 Young Mutual Funds To Consider Based on these facts, we present four mutual funds that were incepted in 2010 or later and carry either a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). We believe these funds will outperform their peers in the next few years. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify the potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund. Along with impressive returns since their inceptions, these funds also have encouraging one- and three-year total returns (as of December 31, 2015). The minimum initial investment is within $5,000. These funds also have a low expense ratio and no sales load. Fidelity Series Real Estate Equity Fund (MUTF: FREDX ) seeks high income and capital appreciation. FREDX invests the majority of its assets in companies associated with the real estate industry across the world. The fund is expected to provide a higher return than that of the S&P 500 Index. FREDX was incepted in October 20, 2011. Since its inception, this Zacks Rank #1 (Strong Buy) fund has returned 12.7% and gained 3.6% and 12.7% over the past one- and three-year periods, respectively. FREDX has an annual expense ratio of 0.74%, significantly lower than the category average of 1.29%. It has no minimum initial investment. MFS International New Discovery Fund Retirement (MUTF: MIDLX ) invests in non-US equity securities, which also include equity securities of companies located in emerging nations. MIDLX invests in securities such as common stocks, preferred stocks and REITs. It invests in securities of companies that are believed to have impressive growth prospects. The fund may allocate a significant portion of its assets in a specific country or region. It was incepted in June 1, 2012. Since its inception, this Zacks Rank #1 fund has returned 9.2% and gained 2.9% and 6.3% over the past one- and three-year periods, respectively. MIDLX has an annual expense ratio of 0.95%, below the category average of 1.53%. It has no minimum initial investment. Thornburg International Value Fund Retirement (MUTF: TGIRX ) seeks growth of capital over the long run. It primarily focuses on acquiring securities of foreign companies and depository receipts. Though TGIRX invests in securities of companies located in both developed and developing nations, it invests a larger share of its assets in securities from developed markets compared to those from the developing markets. The fund was incepted in May 1, 2012. Since its inception, this Zacks Rank #2 (Buy) fund has returned 9% and gained 6.8% and 5.4% over the past one- and three-year periods, respectively. TGIRX has an annual expense ratio of 0.74%, lower than the category average of 1.34%. It has no minimum initial investment. Strategic Advisers Growth Fund (MUTF: FSGFX ) generally invests in Fidelity Funds and non-affiliated funds that take part in Fidelity’s FundsNetwork. FSGFX also invests in non-affiliated ETFs. It invests in large-cap companies having market capitalization within the universe of the Russell 1000 Growth Index. FSGFX was incepted in June 2, 2010. Since its inception, this Zacks Rank #2 fund has returned 16% and gained 5.1% and 16.7% over the past one- and three-year periods, respectively. FSGFX has an annual expense ratio of 0.31%, below the category average of 1.18%. It has no minimum initial investment. Original post