Sector Bullish Percent Indicators are relatively new to ITA Wealth management. While I am not a believer in building a portfolio through sectors, I do follow them as there may be opportunities to add a particular sector to a portfolio built around asset classes. For this reason, I track the Bullish Percent Indicators (BPI) as shown in the data table below. The reason I favor asset allocation vs. sector allocation is that all sectors do not cover all asset classes, but all asset classes will cover all sectors.
How does the performance of a DFA oriented portfolio perform when compared with the Euclid Portfolio, one of the older portfolios tracked here at ITA Wealth Management? I selected the Euclid as it is one of the poorer performing portfolios over the last thirteen years. The reason for the lagging performance is that I allowed too much cash to site idle in the portfolio for long periods of time. In other words, stupid portfolio management.
Keeping in mind the inherent possible errors when making comparisons between portfolios, here are the results between what I will call the DFA Portfolio and the Euclid Portfolio.
Beginning on 6/18/1999 and ending on 6/329/2012, the DFA Portfolio had an annualized return of 5.8% with a standard deviation of 9.11%. That is a low SD considering the market volatility over the past 13 years. Over this same period, the QPP software indicates the S&P 500 had an annualized return of 1.3% with a SD of 16.1%. The DFA Portfolio performance was far superior to benchmark standards.
My calculation for the VFINX, a mirror of the S&P 500, had an annualized return of 4.2%. Why the huge difference between QPP results and my results gleaned from the TLH Spreadsheet? Tracking the Euclid Portfolio using the TLH Spreadsheet takes into account the cash added to the Euclid over the 13 year period. Cash flowing into the portfolio was not trivial and that gives rise to the difference between the 1.3% reported by the QPP software and the 4.2% value calculated by the TLH Spreadsheet. This difference is one of the inherent potential errors I mentioned when I wrote about the difficulties of comparing portfolio performances. The link to this blog article is provided above.
How well did the Euclid perform? Not well as the annualized return from 6/18/1999 through 6/29/2012 is 2.4% or well below that reported for the DFA Portfolio. Subtract 90 basis points from the DFA portfolio and it still outperforms Euclid by 2.5% points each year. That is anything but a trivial difference. I would have been better served to pay the fees and turn the portfolio over to the DFA advisor.
How well did the DFA Portfolio perform when compared with the total U.S. Equities market (VTSMX)? Minus fees, the DFA portfolio outperformed the VTSMX by a mere 0.1% point. Yes, it did better than the U.S. Equities market, but the difference is slight. If there was any slippage in rebalancing the DFA Portfolio, it is highly unlikely any alpha was added by the DFA advisor. It is impossible to answer this question with any certainty.
There you have it. By selecting a poor performing portfolio from the ITA stable, I was able to find a situation where a DFA portfolio performed much better than one of the ITA Wealth Management portfolios.
Just a note to Platinum members. If you closely monitor your portfolio, take a broad diversification approach to portfolio construction, and avoid three sigma bear markets by implementing the ITA Risk Reduction model, there is a high probability you will not need professional help.
Is it fair to compare performance results of different portfolios? ITA Platinum members have see a number of comparisons on this blog and I plan to publish more results. However, there are inherent problems when it comes to portfolio performance comparisons. Let me list a few as it is important to keep in mind these problems.
1) When selecting a sample portfolio from a web site or using the "Swensen Six" as examples, there is no way the asset allocation is going to stay in the exact percentage balance over the course of the study. This leads to incorrect performance results from portfolio to portfolio. See rebalancing issue below.
2) In most portfolios, cash flows in and out of the portfolio. Calculating performance results based on starting and end dates does not take cash flow into consideration. Those changes are recorded in portfolios tracked by the TLH Spreadsheet, but not in the portfolio picked off the Internet.
3) Strategic Asset Allocation plans differ from portfolio to portfolio. Direct comparison is difficult to pull off.
4) Exactly when asset classes are rebalanced differs from portfolio to portfolio. This will throw off the comparison results.
How could one set up a situation for a fair comparison? The best way is to divide a sum of money equally between two investors. Agree on a starting date and then check results 20 years later.
Bullish Percent Indicator (BPI) information is a relatively new addition here at ITA Wealth Management. It is another investment arrow we are including in our investment quiver. A major change I made this week is to move from an arithmetic measurement of the box size to a log or percentage scale for calculating the box size. Just as it makes sense to calculate portfolio increases or decreases in percentages, the same is true when examining the box sizes of a Point and Figure graphs. This shift from an arithmetic to percentage scale did result in the NYSE moving from O's in the right-hand column to X's in that column. Regardless of the switch, the absolute number of stocks moving into bullish territory increased this week, indicating the market strengthened. Below is the latest information on the major indexes.
The Schrodinger Portfolio is our premier passively managed portfolio that has been operational since 12/01/2000. Looking back over the past five years (6/29/2007 – 6/29/2012), how well has this portfolio performed when compared to a portfolio made up of DFA mutual funds with a similar asset allocation plan? The results are rather stunning in favor of the Schrodinger.
Schrodinger Portfolio = 4.17% annualized return with a standard deviation of 19.1%.
DFA Portfolio = 1.4% annualized return with a standard deviation of 17.13%. Advisor fees of 50 to 90 basis points need to be subtracted from the 1.4%. In other words, net of fees, the DFA Portfolio returned below 100 basis points annually over the past five years.
The Schrodinger outperformed the DFA portfolio by over 3% points annually.
Disclaimer: I need to examine performance over different periods as this may have been a particularly bad period for DFA mutual funds.