Portfolio Management
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The term appropriate benchmark has been used many times in this discussion. I have also mentioned my base portfolio and some statistics about it. Took the time this morning to properly benchmark the portfolio as I feel it makes my point. First, I said earlier that ETFs cannot be used to properly represent all asset classes. This is because many indexes do not as of yet have a corresponding ETF. Also, when you get beyond the S&P for example into more complicated asset classes such as currencies, there is far more slippage in ETFs.
Here is the appropriate indexing for the portfolio I mentioned earlier. 18% CSFB/Tremont- Managed Futures 27% FTSE AW Ex USA 31% S&P TR 8% LB 1-3 Year Govt 16% LB Aggregate Bond R2 of 96 so I trust you will find the mix appropriate. Portfolio beta of .82 compared to index. Alpha of 4.66 compared to index. $100m invested in 1995, portfolio worth $406m net of 1.5% fee, index $244m net of same 1.5% fee. Here is the problem with indexing, an ETF to track the CSFB/MFut does not exist. That is 18% of the portfolio! Putting in your plain vanilla commodity ETF drops cumulative performance by 12%!! $49m over 13 years should give you pause for thought. It can be done. It is far more difficult to do, but it can be done. VFINX ranks in the 43rd percentile in it's category for the last 10 years. I will agree that some funds in the category should be in a different category. Statistically speaking, just as many underperformers as outperformers should be elsewhere. So the ranking is reasonably accurate in my opinion. Are there issues with active manager? YES. It is not perfect nor does it gaurantee excess returns. Do I know before hand which managers will outperform? No. Just as you do not know if your ETF asset blend will accomplish you clients needs. Indexes can blow up. Reference the Qs. Again, not even making the attempt is lacking in my opinion.Just got done with my yard work, what a pain. I have heard what you have said, I am trying to respond to two people at once and that is why it appears I am ignoring some of your points. I assure you I am not. This entire discussion comes down to preference. I do business one way, others do it another way. Odds are neither is completly right or wrong, just different. It has taken years for me to put together how I do business. If I could net more to the client with ETFs, CDs, or anything else I would. I am not married to using active managers. I have just not found a way, although I am constantly looking. I do still look at the S&P being in the 43rd percentile as highly supportive to my case. From more of a big picture perspective, most (I respect that you don’t use ETFs for EVERYTHING) brokers I know that use ETFs simply put together a 40% S&P, 30% EFA, 10% alternative, 20% AGG and off they go. Most of my criticisms are directed at these brokers whom I consider to be quite lazy. I have enjoyed discussing the finer points and appreciate the back and forth. We certainly can agree to disagree on some points.
ICE
I like 99% of what you’re saying.
But
Transaction costs: these are already built into performance. Are you subtracting this after performance is already calculated?
American Funds: I agree they style drift alot and drift from benchmarks alot, and it’s misleading to compare them to certain benchmarks, but don’t you think they still do a good job? They’ve been overweight energy and underweight financials for quite some time…that has been right on the money. Additionally they pile up cash and invest it when it looks like the sky is falling.
Primo,
If you are an independent, check out: http://www.symmetrypartners.com/SymmetryHomePortlet/home.htm They basically "buy the market" using Dimensional Funds. In their models, you would own over 10,000 stocks in 40 countries. They don't try and predict the market. They do overweight small cap value, just because that has done a little better over the past forty years. And, if you want to take 1%, the client is in at basically 2.1% (1% for you + .5% for Symmetry + .2% for Custodian + .38% for Dimensional Funds).[quote=newnew]total agreement with Ice. Snags and Primo are saying the things many brokers say to get sales. It’s easy; “look at what these managers have done-they beat the market! Make the check out to Edw…”.
Another way to say it, which I also disagree with, but which is implied but your posts, is "we don't really believe in the markets, they are so inefficient that even I can spot IN ADVANCE which manager will do MUCH BETTER-- so much better that it is easily worth not only the fund cost and the funds undisclosed trading costs, but also a 3.50% upfront load-- it's worth it even though it is totally in MY best interest to make that claim!"[/quote] Funny, I thought this forum is for brokers. We make our living selling, and commissions are how we're compensated. If you cannot influence a client to do the right thing, whether it's with American funds with a proven track record or persuading them just to buy index funds from you and pay you 1% every year, you have done a disservice to both the client and your family. Your discussion belongs on the fp.com website where you guys can sit around all day crunching numbers til they support your argument and avoid the guilt of not being on the phone prospecting for new clients. If you think expenses are the only guage of suitability, you should go to work for Vanguard.[quote=now_indy]Primo,
If you are an independent, check out: http://www.symmetrypartners.com/SymmetryHomePortlet/home.htm They basically "buy the market" using Dimensional Funds. In their models, you would own over 10,000 stocks in 40 countries. They don't try and predict the market. They do overweight small cap value, just because that has done a little better over the past forty years. And, if you want to take 1%, the client is in at basically 2.1% (1% for you + .5% for Symmetry + .2% for Custodian + .38% for Dimensional Funds).[/quote] I appreciate the offer, but that is almost exactly the opposite of what I do.Lakers-I hear ya, but RIAs are allowed on this site. My posts sound serious, but it’s all a game. C’mon, it’s an internet forum not a sales seminar. MANY folks on this site forego commissions. It’s mostly academic but also it’s niche marketing. I defend my style, you yours, it’s fun and nothing personal. BTW, I coldcall plenty-- it’s still sales because I can’t crunch numbers without clients! Niche marketing is a lot like sales as well.
Now_indy: thanks for the tip. I like DFA, but it’s a long road to getting approval (incl trip to So Cal from midwest). Their “almost passive” style, based on academic research (there goes the # cruncher again!) fits my style well. I’ll check it out, although over 2% gets into mutual fund cost territory.
That's one of the nice things about using Symmetry, you don't have to be approved by DFA. Once Symmetry approves you (which is usually done over the phone), just start opening accounts, and sending them checks. I agree that the 2% seems a little steep, but I can't think of anywhere else the client can go to get that kind of diversified investment. If you really don't like it, you can lower your fee below 1% .Now_indy: thanks for the tip. I like DFA, but it’s a long road to getting approval (incl trip to So Cal from midwest). Their “almost passive” style, based on academic research (there goes the # cruncher again!) fits my style well. I’ll check it out, although over 2% gets into mutual fund cost territory.
Sorry to jump in this “exciting debate” so late in the game, just looking for an opportunity to learn. I am still a rookie and trying to find the best place for my clients in the midst of; firms recommendations, wholesalers, Senior Advisors can’t fail picks, and my own personal thoughts.
I have some questions for Iceco1d and I wanted to be upfront from the standpoint I am asking and trying to learn, not judging or questioning what it is you do. You state that indexing is the only way to go with the more efficient Large Cap and don't believe there is room for an active manager to add alpha or returns over a long period of time. On a long-term 10+ year time horizon I agree that 99.9% of active managers can not out perform the S&P 500. The way you defend this is that if you stuck with one active manager over the 10+ time frame, after transaction + management fees that your indexing strategy would beat all active managers. To this I agree, but what if you didn't stick with one active manager throughout the entire 10+ time frame. What if using efficiency and technology you could tell that in XX market environment YY sector within the S&P will out perform the overall S&P 500 and you invest in a manager that has overweighted YY sector. For example if you invested in an actively managed fund that only invest in stocks held in the S&P 500 that has overweighted energy you would have obviously beat any S&P index fund. In obvious down cycles in the market I believe your strategy will beat anything else out there. In down markets the chance that an active manager will beat the S&P narrows and by indexing you are giving your portfolio they greatest chance of beating the active managers due to the narrowing in the amount of stocks that can beat the index. While in an up market the % of equities that can beat an individual index widens, and the chance of an active manager selecting an equity that can beat the market it greater. In an up market the likley hood of an index beating an active manager decreases. If the goal is to keep cost down by indexing why go the Mutual Fund (Vanaguard) route? Why not go the ETF indexing route, is it not cheaper for the client to use ETF's and therefore cut cost even more? I know you said you don't like or use ETF's just wondering why if your goal is to get the client in the lowest cost in an efficient market. I noticed you bring up BRIC quite a bit, do you still believe BRIC is the place to be as a satellite? With Russia and India having extremely high inflation I have been taken my gains in BRIC and reallocating away from Russia and India and into more of a pure Latin America. I am also looking into Africa and Middle East as the next BRIC to take advantage of the untapped growth potential in these markets. I like TRAMX in the Africa and Middle East play. Thanks for your post, it is definitely educational.[quote=iceco1d]
Thanks for the compliments Bull. I'll do my best to respond to your questions, but I'm afraid my posts of 1,000+ words are done for a week or so (getting married on Saturday). However, feel free to PM me anytime with questions (although, from what I've read from your 500 day war post (very informative btw), I think the BEST thing you can do for your clients, is make it to year 5...all the strategizing in the world won't matter if you aren't here still in 2015). [/quote] [/quote] Good luck with the Wedding, I'm sure you'll be out of touch for a week or so we can pick up then. Enjoy the Wedding and Honeymoon it flies by quickly.Which major wires or regionals will let the FA act as the PM on a discretionary fee basis as a PM for clients? From what I read on this thread WS and SBS allow this type of portfolio. I work for RJ and as far as I know, we do not have anything like this offered. Who else?
Though not a wirehouse, LPL will let you do discretionary trades if you only use mutual funds or ETFs, in their SAM platform. If you want to trade individual stocks or bonds, you would need to get the client’s permission each time. They do monitor the account, and if you aren’t being competitive with some benchmarks, you better have a good explanation of why.
While this is not a full list by any means, I know these firms offer some sort of discretionary fee management.
Merrill Lynch
Smith Barney
Wachovia
I think it is available to RJ brokers, but just about everybody applies strict standards to potential portfolio managers.
There is a level of production required. they also require a years in business requirement, and finally a very clean U-4. most also require some training before allowing a FA to practice.