Bullish Percent Indicator Update

A stronger market this past week resulted in the Bullish Percent Indicator improving for several indexes.  However, our primary BPI, the NYSE, continued to decline.  The data is presented in the following table.  Note that the NASDAQ 100 shifted the ball from defense to offense.  It will be interesting to see if technology leads the U.S. market out of this mini-bear market.

Each of the six major indexes showed improvement this week with exception of the NYSE, our most important index.  The hidden columns between G and P show the differences from week to week.  Since the table is already so wide that one needs to scroll from side to side, I hid that information as it is not all that useful.  The red background of an index indicates an overbought situation.  Green is an oversold condition.  No index fits either classification this week.

Sectors:  The table below breaks the U.S. Equities market into ten different sectors.  Energy and Materials handed the ball off to the other side, one to the offense (X's) and one to the defense (O's).  I don't pay as much attention to the sector BPI values as I do to the NYSE.  However, it is worthwhile watching what the different sectors do as we may find a buying opportunity in the future. 

Portfolio Performance Update: 9 June 2012

Nearly all eleven portfolios gave up the gains of last week as both international markets (developed and emerging) "popped" a few days this week.  As might be expected, the Schrodinger maintained its stable performance as the asset classes are in balance and we are not using any type of Tactical Asset Allocation with this portfolio.  As a reminder, the Schrodinger is our best example of a passively managed portfolio.

The portfolios did gain in value as this was a good week for most asset classes.  It appears as if the June bounce is in effect after a miserable month of May.  As you will see later in the morning, the Bullish Percent Indicator is still negative on the overall market.  More on those details later today.

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High Fees Are A Problem

Three days ago I posted a link to The Portfolioist to draw your attention to how fees cut into your retirement account.  The American Association of Individual Investors (AAII) is also featuring this study.  Here is the AAII announcement that was sent out to subscribers on June 7th.

Dear Member,

If you lost $155,000 to fees, how angry would you be?

This is the amount of money the average American household will pay in 401(k) fees over the course of their lifetime, according to a new study. Demos, a research and advocacy organization, calculated the expenses based on a two-earner household working and saving over a course of 40 years. They determined that out of a hypothetical $509,644 that could have been saved in a hypothetical portfolio with no expenses, $154,794 was lost to fees.


In contrast, fees to be a Platinum member for 40 years would cost you $2,400.  Quite a difference.  And I will put our returns up against any actively managed mutual fund over a long period of time.

If you missed the Portfolioist article, take time to read it as it is a serious piece of writing that every saver should integrate into their investment strategy.  Cutting fees is one of the critical ways to avoid poverty.

The Asset Allocation Hoax

Prominent asset allocation critic, William Jahnke, titled his 1997 attack on the Brinson et. al. (BHB) papers, “The Asset Allocation Hoax.” Jahnke’s criticisms of the two papers are many. He argues the authors do not focus on the proper problem, they report the wrong number, cost is not considered, and they give the wrong advice.

To better understand the problem, here is the abstract from the first Brinson, Hood, and Beebower paper, “Determinants of Portfolio Performance.”

In order to delineate investment responsibility and measure performance contribution, pension plan sponsors and investment managers need a clear and relevant method of attributing returns to those activities that compose the investment management process–investment policy, market timing and security selection. The authors provide a simple framework based on a passive, benchmark portfolio representing the plan’s long-term asset classes, weighted by their long-term allocations. Returns on this “investment policy” portfolio are compared with the actual returns resulting from the combination on investment policy plus market timing (over or underweighting asset classes relative to the plan benchmark) and security selection (active selection within an asset class).

Data from 91 large U. S. pension plans over the 1974-83 period indicate that investment policy dominates investment strategy (market timing and security selection), explaining on average 93.6% per cent of the variation in total plan return. The actual mean average total return on the portfolio over the period was 9.01 per cent, versus 10.11 per cent from the benchmark portfolio. Active management cost the average plan 1.10 per cent per year, although its effects on individual plans varied greatly, adding as much as 3.69 per cent per year. Although investment strategy can result in significant returns these are dwarfed by the return contribution from investment policy — the selection of asset classes and their normal weights.

Jahnke’s “The Asset Allocation Hoax” is not as easy to find on the Internet as it once was. If you Google "Asset Allocation Hoax" you should be able to find a pdf file of the paper.

The following article on this topic by William Bernstein is well worth a careful look.


Since Jahnke, Bernstein and others have commented on the Brinson et. al. papers (there were two), Ibbotson & Associates have studied and expanded on these results several times.  In their recent work, Ibbotson concludes that only 12.5% of the portfolio return is attributed to asset allocation.  Another 12.5% is tied to management decisions, far higher than previously thought.  A full 75% of portfolio movement is linked directly to market movement.  Not too surprising.  If 75% of the risk of a portfolio is tied to market movement, we have another argument for tracking the Bullish Percent Indicator (BPI). 

All the studies I've seen still rely on breaking portfolios down into stocks, bonds, and cash. No attention is paid to the separation of value and growth let alone different size asset classes. Therefore, we consider most of the studies to be flawed or at least limited for our purposes. While we cannot prove our style tilt is making a difference in performance, our intuition tells us that skewing a portfolio toward value and small-cap asset classes does make a difference over the long term. Including developed international markets, REITs, emerging markets, and commodities also help to elevate the Sortino Ratio.

Platinum membership available for $5.00 per month. Learn portfolio construction, management, and monitoring through the use of a unique spreadsheet. Learn more about the Sortino Ratio with a Platinum membership.