The myth of asset allocation

or Register to post new content in the forum

66 RepliesJump to last post

 

Comments

  • Allowed HTML tags: <em> <strong> <blockquote> <br> <p>

Plain text

  • No HTML tags allowed.
  • Web page addresses and e-mail addresses turn into links automatically.
  • Lines and paragraphs break automatically.
Jan 4, 2006 1:37 pm

[quote=Beagle]Standard Deviation shows volatility but is that the same as risk?  For you maybe.  To me it's volatility and to me volatility isn't risk, it's opportunity I try to utilize.  Warren Buffet and Steven Markel have spoken on this recently.[/quote]<?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Clients, without a doubt, see downside volatility as risk. If you're saying that a given sector or stock experiencing downside volatility can be a buying opportunity, I would agree. That’s exactly what rebalancing forces you to do, buy those assets experiencing the downside and sell those on the up.

[quote=Beagle]In 1987-1989 I spent several hours per week with my finance professors building a software program to build optimum portfolios using MPT.  After 2 full years of backtesting and statistical work they compared our data to that of another university doing very similar work.  Both teams came to the conclusion that it didn't work very well.  The result is a portfolio that performs well enough but the fees and taxes (if applicable) will over power the long term performance of picking an average mutual fund with lower expenses and tax maintenance.  [/quote]

Given that MPT, in its most strict form is balancing varying indexes (remember, MPT holds that active management can’t beat indexes for any real length of time) I have no idea how you could have used it to develop a portfolio that had a drag in fees and taxes. You might want to contact the Nobel Prize committee.  You might also want to detail these fees and taxes you constantly reference. It isn't as if the average mutual fund doesn't generate taxable events and require a fee.

[quote=Beagle]When I did the study courses for the CFP, all but one of the instructors had come to the same conclusion and were more interested in selling financial planning and deteremined asset management was an easy sell to pay the bills. [/quote]

That’s interesting, because not one of my instructors cared about the “business end” of being a CFP or commented on selling (it’s not part of the exam) and they all were the most radical adherents of MPT you’d ever hope to meet. The considered active management to be akin to theft and felt every client could be best helped with a portfolio of index funds (not very many ETFs at the time) in a tailored asset allocation model.

[quote=Beagle]Asset allocation is all well and good and my clients receive it but I use a form of tactical asset allocation with long term goals in mind to outperform the market. 

[/quote]

Most advisors I know do the same, mixing strategic and tactical asset allocation efforts. That’s why so many have been light on fixed income for years, regardless of what the models have said.

 [quote=Beagle]
My bashing of asset allocation is more along the lines of what Skeedaddy is doing.  It looks good in theory and increases sales but in about 10-15 years if you'll look back at the portfolio, the odds are overwhelming that the portfolio has underperformed after taking into account taxes and fees. 

[/quote]

I assume you’re being critical of asset allocation and not Skeedaddy, since it’s not exactly clear. If that’s the case you’re making assumptions about fees and taxes that I doubt you can support. Your clients pay taxes and they pay you a fee, I assume.

[quote=Beagle]
My bashing of EIAs is more to do with the fact that the selling practices are very similar to that of asset allocation selling. 

[/quote]

Oh, come on. I’ve been able to see your position up to this one. EIAs are a product, not a process and they’re just shy of legalized theft given their high fees and low real return (by return I mean “risk free” nature, as most any portfolio, well balanced and held long as the 10 year surrender of those things can be expected to provide similar returns without that drag of the “guarantee” fees). You simply can’t say, with any real confidence, that asset allocation isn’t in the interest of the client and your broad generalizations about fees and taxes don’t hold water. How about you try getting specific on those two?

 

 

 

[quote=Beagle]
But history shows that a buy and hold investor that buys an S&P 500 index fund has a pretty darn good chance of outperforming any professional over 20 years after taking out fees and taking taxes into consideration. [/quote]

I disagree with that completely, but I wonder, if you believe it, how do you sell investment services thinking they have no real value? Why not tell your clients they should buy and S&P 500 fund and call it a day?

[quote=Beagle]

my portfolio management, I don't share it really - sorry.

[/quote]

So I have to defend a known thing, and you get to hide behind an alternative that remains a mystery....

[quote=Beagle]

  Back in 1991 I was introduced to an old guy in our area with an absolutely awesome track record. 

[/quote]

I remember awsome track records, in fact, I remember many. I also remember how many of those "awesome track records" disappointed when that particular investment style and capitalization went out of favor.

In fact, we could have a great day talking about the mutual funds (and I only choose funds because we all know the names and records, but the same applies to every portfolio format) that had an "awesome record" and was on everyone's "must own" list that disappointed badly in changing market conditions. Can I start? How about the Janus Fund when the market shifted from momentum investing?

[quote=Beagle]

I paid him to teach me over the course of a year how he invests and how he designs his portfolios.  Best investment I ever made in my career but it didn't turn me into a better salesman which is something I could use.
[/quote]

Ahhh, you have the black box that outperforms portfolios designed using Nobel Prize winning theory, but you can’t let us in on any of the details. Well, I don’t mean to be insulting, but I’ve seen literally thousands of little back boxes. In the form of individual managers, mutual funds, SMAs, UITs, etc., etc., etc..

 

It’s been my experience that over the long term black boxes tend to perform equally well, but in different patterns of being in and out of favor with the market. As I’ve said before, <?:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Warren wasn’t an idiot when his Graham/Dodd style was out of favor in the 1990s, and he’s not omnipotent today. His style, like all others, goes in and out of favor with the market. Because of that I prefer to mix and match those black boxes keeping in mind their correlation and risk/reward profiles.

Jan 4, 2006 2:27 pm

Mike,

Ibbotsson driven strategic allocation in one of 5 predetermined models (Agg, Mod Agg, Mod, Mod Cons, Cons), packaged into any variety of dozens of mutual fund wrap programs (fund solutions, Portfolio Architect), SMA accts, mutual fund of funds (allocator funds), lifestyle funds, ETF Wrap accts etc, etc......   These are products using asset allocation as the process.  Hot Dots were a process, albeit a process of trend following eg: look how well these companies have done let's buy them, many products were created around this process (mutual funds, uits etc...).  Asset allocation is a similar process: Hey look how well a portfolio would have done if we mixed assets in these ways.

I think that asset allocation is fine way for crappy investors like me (bad at picking stocks) (give me credit for being honest) to not blow people up, but I don't believe it's a way to get great returns either.  I guess I'm a believer that inefficiencies are out there to be exploited by those more astute than I and that whatever is now hot will one day cease to be.  Also, I don't think that mutual fund managers or most of wall street are necessarily the "smart" money either.  Their job is marketing a dream and profiting from those who want to try to participate in the dream.

Truth is, is that anyone (not just Advisors with degrees and licenses)can take the ibbotsson allocation model and plug in the proper index funds and most likely do better than most allocation products, especially if they remove me and my 1.5% fee from the equation.  Now, most of my 50 plus year old clients aren't savvy enough to go online and read a little (emphasis on little) to learn that this is essentially all I do (besides the financial planning stuff, which I'm begginning to believe is better to charge a retainer for) and charge them, Oh $3,000 (on $200,000) or more a year for, plus another $3,000 for active managers who have a very low probablity of earning that money (underperformance relative to their benchmarks).  The concern is that Gen X is savvy enough.

The truth is, is that for asset management in an ASSET ALLOCATED (I am generalizing here) fashion my clients should bypass me, since I'm not going to be doing much other than filling out a risk quesitonaire, teaching them a little and then placing them in the wrap account.  The rebalancing is automatic.  Everything else is FAT; birthday cards, client appreciation events, even the financial planning( which takes me 15 minutes of data entry, printing and binding) or the HOLY "I'm here to prevent my client from making the BIG mistake of selling when the markets are scary"  .  Well once they've filled out their risk tolerance questionaire, doesn't that take care of the BIG MISTAKE argument?  Don't you end up putting them in a portfolio that matches them with a portfolio that they are likely to hold onto.

Now, if you're a broker who researches special investment ideas and earns commissions or manages stock positions for a fee, this is different since you are actually researching, watching and positioning assets.  These are activities that seem appropriate to earn asset based fees for, whether you outperform the market or not in a given year)

Here's the argument:

A share mutual funds are the most appropriate compesation model for the majority of what brokers do when it comes to a one time education, financial planning, product sale with occassional servicing.  Compensates us for what we do based on the work involved and long term the fees are pretty darn good with the right fund families.

Fee based compensation is most appropriate for direct active asset management and family office type services (this is high end bill paying, walk your dog stuff).

Retainers are most appropriate for financial planning, manager research and recommendation.

Any thoughts

Jan 4, 2006 3:59 pm

[quote=dude] <?:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

Mike,

Ibbotsson driven strategic allocation in one of 5 predetermined models......   These are products using asset allocation as the process. 

[/quote]

First off Ibbotsson isn't the be all and end all of asset allocation, much less is using one of five models a fine example of a refined, tailored to the client, system.  If that’s what you’re calling asset allocation we will probably agree on many of the shortcomings of that business model. Furthermore, each of the products you mentioned have pros and cons and shouldn't be lumped together any more than all mutual funds should be lumped together. Asset allocation remains a process, even is a product is stuffed into it at the very end.

[quote=dude]

 

 Hot Dots were a process, ….Asset allocation is a similar process: Hey look how well a portfolio would have done if we mixed assets in these ways.

[/quote]

You're confusing looking in the rear-view mirror at a handful of funds to get a big performance number that weak advisors use to “sell” clients with a process that measures the performance of market sectors (not active management) and notes the correlation between them. That’s a different as night and day.

[quote=dude]

I think that asset allocation is fine way for crappy investors like me (bad at picking stocks) (give me credit for being honest) to not blow people up, …

[/quote]

Time for a dirty little Wall Street secret. While there ARE crappy stock pickers, there are NO stock pickers, no matter how good, who look good in every market cycle. That’s why even the sainted <?:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Warren looked like a clueless old man in the 1990s.

[quote=dude] …but I don't believe it's a way to get great returns either.  I guess I'm a believer that inefficiencies are out there to be exploited by those more astute than I and that whatever is now hot will one day cease to be. 

[/quote]

 

Not only is it  a way for great returns, it’s a way to hire experts in very narrow fields (small cap growth managers, Large cap deep value managers, etc) who can stick to what they do best, exploit those inefficiencies and you profit from it.

 

[quote=dude]

 Also, I don't think that mutual fund managers or most of wall street are necessarily the "smart" money either.  Their job is marketing a dream and profiting from those who want to try to participate in the dream.

[/quote]

 

I agree and disagree. Wall Street at large IS in marketing that dream. Individual mangers, otoh, at their best manage money and leave marketing to others. The very same criticism can be made, btw, of the guy who runs the one man shop with the black box, can’t miss, system.

 

[quote=dude]

Truth is, is that anyone (not just Advisors with degrees and licenses)can take the ibbotsson allocation model and plug in the proper index funds and most likely do better than most allocation products, especially if they remove me and my 1.5% fee from the equation.

[/quote]

Only if you make a habit of employing in your various sectors managers that can’t beat their respective indexes. While beating the S&P 500 isn’t all that easy for, say a large cap growth manager, many do it regularly and when you’re talking about other indexes, like the S&P 400 and 600 or the EAFE, there are mangers running money in those sectors that beat the indexes like a drum day in and day out.

[quote=dude]

and charge them, Oh $3,000 (on $200,000) or more a year for, plus another $3,000 for active managers … [/quote]

You’re charging 3% on 200k accounts? No wonder you worry about the drag of fees. BTW, if your managers can’t beat their respective indexes, look for others who do.

[quote=dude]

The concern is that Gen X is savvy enough.

[/quote]

Yeah, that’s why study after study show they buy at the top and sell at the bottom.

[quote=dude]

The truth is, is that for asset management in an ASSET ALLOCATED (I am generalizing here) fashion my clients should bypass me, ……"I'm here to prevent my client from making the BIG mistake of selling when the markets are scary” [/quote]

First, no, you don’t end up putting them in portfolios so tame that they’re never tempted to sell in “scray markets”. Don’t under estimate the damage they can do to themselves with “the big mistake”. Ask Duke again about the “Yeah, but you’re only making me 20% with your balanced portfolio and I want to put it all in the Janus Fund and make 67%” clients. If you’re like me you’ve saved them DECADES worth of what they pay me by keeping them from financial suicide. Having said that, honestly, if that’s all you do, you aren’t giving them what they’re paying for. You job is more than filling out questionnaires and holding hands..

 

[quote=dude]

Now, if you're a broker who researches special investment ideas and earns commissions or manages stock positions for a fee, this is different since you are actually researching, watching and positioning assets.

[/quote]

I’d say that’s an investment advisor who thinks they’re a portfolio manager (such is a subset) or an analyst. Every firm (and by all means, don’t use ONLY your firm’s work) has people already doing that and unless you’re a CFA with decades in the business you won’t do their job better than they do. I’d suggest you pay that very same sort of attention you say stock pickers do and spend that time researching the managers you can hire (I’m talking SMAs here), their philosophies, strategies and histories so you can really understand the slices of the pie you’re showing to clients. Once you grasp the deep differences between them all and how their work coalesces in a portfolio you really aren’t doing much more than filling out a foem and using one of five asset allocation models.

[quote=dude]

Here's the argument:

A share mutual funds are the most appropriate compesation model for the majority of what brokers do when it comes to a one time …

Fee based compensation is most appropriate for direct active asset management ….

Retainers are most appropriate for financial planning, manager research and recommendation.

Any thoughts

[/quote]

 

Yeah, tell me more about your retainer idea, and tell me why it’s more work and more appropriate for fee compensation to say to a client “Let’s buy 100 shares of HD” than it is to research and know in depth the appropriate managers (again, SMA) and combinations to get the job done in a portfolio? What makes the former appropriate for fees and the latter only a retainer issue? Aside from that, I think we agree on a lot.

 

 

 

 

 

 

 

 

 

 

 

Jan 4, 2006 4:22 pm

Beagle & Mike, you guys are giving us a great exchange of thoughts.  Good, fair debate without getting nasty or personal.  Thanks for this, and for setting a high standard for the forum.  Keep it up.

Jan 4, 2006 4:30 pm

I echo Dukes thoughts.  Thanks for the candor.

Beagle:

I know you don't want to share your secrets, but would you mind giving us an idea of some of the process you use for portfolio management without disclosing your secret sauce?  I appreciate your critisisms and insight (many of which I agree with), it's just that I don't come here to engage in ego fufilling debate, but instead to improve upon my process and learn (and hopefully help others do the same).  Can you make any suggestions on what a better process might be?  Thanks in advance for any thoughts you have to share.

Jan 4, 2006 4:32 pm

Note:  Beagle, I’m not suggesting that you come here for ego fufilling debate (just noticed that my post imply’s that, sorry).

Jan 4, 2006 5:05 pm

[quote=Duke#1]Beagle & Mike, you guys are giving us a great exchange of thoughts.  Good, fair debate without getting nasty or personal.  Thanks for this, and for setting a high standard for the forum.  Keep it up.[/quote]

I second that comment....

Jan 4, 2006 5:09 pm

[quote=mikebutler222]

[quote=dude]

and charge them, Oh $3,000 (on $200,000) or more a year for, plus another $3,000 for active managers … [/quote]

You’re charging 3% on 200k accounts? No wonder you worry about the drag of fees. BTW, if your managers can’t beat their respective indexes, look for others who do.

[/quote]

I would have expected better math skills from someone that posts as much as you

Jan 4, 2006 5:43 pm

[quote=mikebutler222]

Beagle, btw, I appreciate the civil tone. I’ll try to do my part to maintain it

[/quote]



And then you say a one man shop with a black box system that can’t miss. 



The two don’t add up.



My CFP instructors all knew that in the best sense, they could earn for
their clients 80-90% of what the market earns after their fees. 
This is why most “financial planners” sell financial planning instead
of asset management.  When you consider the fees and taxes their
portfolio adjustments generate, it’s a hard sell to say they can
outperform the market so most don’t even try.  They argue passive
investing is the only “fiduciary” option but we know better right?



The way you discuss money managers - we’ve found something we can agree upon I’m guessing.




Jan 4, 2006 5:58 pm

Gentlemen,

I thought you would get a kick out of this since we’re picking on Janus:



(numbers thru sometime in 2001)

Value Fund/Janus Fund     Style   &nb sp; 5-Year      Return (% annlz’d)



Ameristock (AMSTX)        Large -cap value         & nbsp;   21.67%

Janus Growth & Income (JAGIX)     Large-cap growth     21.65%



Selected American (SLASX)     Large-cap value     20.13%

Janus Mercury (JAMRX)     Large-cap growth              20.01%



Excelsior Value & Restruct (UMBIX)     Large-cap value21.08%

Janus Twenty (JAVLX)     Large-cap growth              19.94%



Nations Intl Value A (EMIEX) Lge-cap value (Foreign)     18.97%

Janus Overseas (JAOSX)     Lge-cap growth (Foreign)     18.58%



Investment Co of America (AIVSX) Large-cap value     16.62%

Janus (JANSX)     Large-cap growth                              16.32%



Amer Century Target 2020 (BTTTX)     Government Bond 11.01%

Janus Venture (JAVTX)      Small-Cap Growth                  10.99%





As far as I remember, the biggest mistake Janus made was maintaining

an overconcentration in tech & telecom. It turned out that many of the 19

funds they managed had the same positions, which can be easy if all the

fund managers shared the same trading floor and attended the same

company presentations. It was a call made by management to overweight

the same names throughout the funds and they paid for that mistake.



Janus also has a series of offshore (registered) funds available only thru

B/Ds. I still have some Janus Technology in my book and it has recovered

very nicely since the debacle. Here was an occassion when I wore my

"value" hat.



When I was at Oppenheimer & Co, the chief strategist, Mike Metz (a

disciple of Graham & Dodd) also discounted the dot coms and advised

investors to overlook them. Meanwhile, every time I signed on to the

internet (dial-up back then) I always ended up looking at the Yahoo front

page. Yahoo went from about $4 to $150, and I and my clients missed it.







If I understand Dude’s point we should be wary that retail Wall Street

(banks and indepedents too) are pushing, I mean directing, us to maintain

broadly diversified portfolios and wrapping them into a fee structure.

This allows them [firms] to realize some level of efficiency and limit

litigation in the future.   But what happens if after 5,6 or 10 years of the

market treading water? Will clients be inclined to try to recover fees in a

lawsuit for underperformance?

Jan 4, 2006 6:50 pm

Thanks Skee for simplifying my thoughts.

Jan 4, 2006 7:47 pm

Mike,

Maybe I'm wrong on this, but the whole idea of receiving ongoing fees for overseeing managers and hiring / firing managers seems futile.  Almost all research shows that the vast (and I mean vast) majority of managers underperform the market and those who reach the upper deciles of performance do not stay there long (except for a statistically insignificant minority).  What REAL value are we bringing to the table by hiring/firing managers? (the only ongoing service I can identify directly related to asset managment under a wrap type program that we provide outside of the financial planning etc..)  To me it seems like rearranging chairs on the titanic.

Ok, so let's say that we choose to do indexing w/in a wrap program.  After we set the model in place what are we being compensated for? automatic rebalancing ? Certainly not manager selection.   

If you are doing tactical allocation, by altering sector weightings etc... that is a role and activity akin to stock picking in that it proposes that you can add value by knowing what sectors/asset classes will outperform (which you might, but alas just like most forecasting tends to have similar results i.e. not great).  In that case, you can make a better justification for charging a fee since there is a more direct ongoing relationship between you and the clients $$$, whether or not your results are better than passive management (although if you keep on underperforming and the client cares, you might loose the client)

the #'s break down this way:

$200k @1.5% for me (the other $3,000 was 1.5% for the mutual fund managers which might be high, fine let's not split hairs) is $3000

over 10 years assuming 10% annual growth my total fee will be $47,809 (not taking into account taxes eroding portfolio etc...)

Do you really think over the next 10 years you have the ability to select the managers that make up for the extra cost of your fee?  If your crystal ball works that well for managers, why not stocks? 

The truth will probably be that the managers you pick will perform about as well as the rest over a ten year period minus your fee. 

NOW THE OTHER SCHOOL OF THOUGHT GOES THIS WAY:

We are not trying to beat an index, we are measured against how the client does relative to their goals.  Fine.  How about this thought:

The more cost you layer onto the clients $$ the lower the probablity you have of meeting their goals.  Especially if the market does not deliver the expected results.

Also, how do you justify a % fee annually for sitting on the $$$.  I'm going to assume if you subscribe to the above you don't hire a money manager based on how well he/she does relative to a benchmark?  If you do see above.

HERES WHY A RETAINER SEEMS APPROPRIATE FOR MOST OF THE VALUE ADDED SERVICES WE PROVIDE FOR THE %FEE:

When you do a financial plan you are giving the client a roadmap based on generally a couple hours work, until it is updated (which usually won't be very frequent) there is nothing else to do if you subscribe to the general wrap investment idealogy.  Let others do the work (money managers).  Why are we getting paid an override on an activity we are adding little value to (asset management).  We should get paid for the value we are providing wouldn't you agree?

Jan 4, 2006 7:51 pm

[quote=skeedaddy2]Hey Mike, how were your holidays? [/quote]

Great, thanks for asking. How were yours?

Jan 4, 2006 7:53 pm

Mine were good, too. My holidays are Christmas and New Years. Is it ok to say “Christmas” on this board?

Jan 4, 2006 7:53 pm

[quote=jonesnewbie][quote=mikebutler222]

[quote=dude]

and charge them, Oh $3,000 (on $200,000) or more a year for, plus another $3,000 for active managers … [/quote]

You’re charging 3% on 200k accounts? No wonder you worry about the drag of fees. BTW, if your managers can’t beat their respective indexes, look for others who do.

[/quote]

I would have expected better math skills from someone that posts as much as you

[/quote]

See if you can follow me here, Jonsie;  $200K charged at a rate of ($3k+$3k) =

3%. Got it?

Jan 4, 2006 8:03 pm

[quote=Beagle] [quote=mikebutler222]

Beagle, btw, I appreciate the civil tone. I'll try to do my part to maintain it

[/quote]

And then you say a one man shop with a black box system that can't miss.

The two don't add up.

[/quote]

Sorry, you make a good point there.

[quote=Beagle]

My CFP instructors all knew that in the best sense, they could earn for their clients 80-90% of what the market earns after their fees.

[/quote]

That fairly sums up the opinion of those of the "absolute MPT" camp (but they‘d say 99% after their 1% fee) . My instructors were college profs, and they believed it with their heart and soul. They were, of course, wrong. Hell, they couldn't even define "the market" beyond the S&P 500.

[quote=Beagle]

This is why most "financial planners" sell financial planning instead of asset management.

[/quote]

I disagree. Most sell planning and not management because 1) They're hard core MPT or 2) they don't have the tools or the inclination to actually manage money.

[quote=Beagle]

When you consider the fees and taxes their portfolio adjustments generate, it's a hard sell to say they can outperform the market so most don't even try. They argue passive investing is the only "fiduciary" option but we know better right?

[/quote]

Again, I disagree. The ones that do it are hard core MPT types who use indexes, by and large, get paid a fee for it and cause the minor taxes that rebalancing causes as the cost of staying in compliance with MPT. It isn't as if they just buy the S&P 500 and take nap.

[quote=Beagle]

The way you discuss money managers - we've found something we can agree upon I'm guessing.


[/quote]

Maybe we have a misunderstanding here. I believe in active management, I simply want to see a number of different managers with differing styles at work in a given portfolio.

Jan 4, 2006 8:44 pm

[quote=skeedaddy]Gentlemen,
I thought you would get a kick out of this since we're picking on Janus:

(numbers thru sometime in 2001)

[/quote]

You mean numbers since sometime in 2001?

[quote=skeedaddy]

As far as I remember, the biggest mistake Janus made was maintaining an overconcentration in tech & telecom.

[/quote]

They were over concentrated because they were buying momentum stocks, which largely happened to be in those two areas. BTW, I didn't mean to pick on Janus alone. I could just as easily mentioned any number of different funds during different periods. It's you're old enough in the business you can remember when the hot dot was Peter "You can't beat him" Lynch at the Magellan fund. Or when Warren Buffett went from being the Oracel of Omaha to dunce and back again to god on earth. It was due to investment styles going in and out of favor, not some incredible genius and then overwhelming ignorance on their part.

[quote=skeedaddy]
When I was at Oppenheimer & Co, the chief strategist, Mike Metz ..."

[/quote]

Metz the megabear. Sour all through the 1990s bear market. The Stephen Roach of his day. Mr Sunshine....

[quote=skeedaddy] But what happens if after 5,6 or 10 years of the market treading water? Will clients be inclined to try to recover fees in a lawsuit for underperformance? [/quote]

"The market" may be treading water, but diversified portfolios aren't. I find it interesting that by "the market" people often mean the S&P 500 and perhaps the DOW as if the S&P 400 and 600, not to mention EAFE and emerging markets didn’t exist. Well, they do exist and they've been beating the daylights out of the growth oriented 500 for five years now.

Jan 4, 2006 8:46 pm

MPT is not “modern”. Was promulgated in the 50’s. Go ahead and index. Still under water after past SIX years. Or better yet…“buy and hold”. Didn’t hear much about that in the 60’s and 70’s. Actuality is that nothing works for long. If it did, everyone would do it and…guess what? That wouldn’t work either. Most people with real dough are interested in capital preservation. Watch their eyes glaze over if you do the gobbledygook thing.

Jan 4, 2006 9:12 pm

[quote=dude]

Almost all research shows that the vast (and I mean vast) majority of managers underperform the market and those who reach the upper deciles of performance do not stay there long (except for a statistically insignificant minority). [/quote]

That's just not true. That thinking is an outgrowth of skewed studies by hard core MPT types who "prove" most mutual funds don't beat the S&P 500 by lumping in all sorts of funds that don't aim to beat the 500, like income oriented funds, balanced funds, etc.. And while beating the 500 IS a challenge for large cap managers, beating the 400, 600 and EAFE indexes is a far easier matter for managers specializing in those areas.

[quote=dude] What REAL value are we bringing to the table by hiring/firing managers?

[/quote]

You mean besides watching for style drift, changes in management teams, how they perform against their peers, etc.? Ever read an attribution report on a manager?

[quote=dude]

"Ok, so let's say that we choose to do indexing w/in a wrap program. After we set the model in place what are we being compensated for? automatic rebalancing ? Certainly not manager selection."

[/quote]

Why do you laugh at rebalancing? Sectors perform in differing manners and they should be readjusted. Don't act as if that's nothing, and don't act as if monitoring both the portfolio and the client's goals and needs doesn't count for anything either. Having said that, I have some accounts where the client wants to use ETF indexes and I usually do that on a commission basis unless they prefer otherwise.

[quote=dude]

If you are doing tactical allocation, by altering sector weightings etc...

[/quote]

I think I mentioned in another post that I do, and most other I know, do do that. We're certainly not using one of five cookie cutter allocations from a ten question form.

[quote=dude]

the #'s break down this way:

$200k @1.5% for me (the other $3,000 was 1.5% for the mutual fund managers which might be high, fine let's not split hairs) is $3000

[/quote]

As I read your other post I thought I saw 3K for you and 3k for managers (mutual funds wasn‘t what I was considering) . That's 3% and mighty high. Let me mention again I don't use mutual funds for this. They're too expensive and too prone to style drift and holding cash not to mention that you have no control of taxes. Using SMAs I'll do an account all in for 2% max.

[quote=dude]

Do you really think over the next 10 years you have the ability to select the managers that make up for the extra cost of your fee?

[/quote]

Even if that was the only thing I did for the client, the answer is, oh, yes.

[quote=dude]

If your crystal ball works that well for managers, why not stocks?

[/quote]

If you believe in asset allocation and the underpinnings of style purity and capitalization weighting, you have to ask when you see a one man portfolio, is he a large cap growth guy, a small cap value guy, an emerging market guy? I don't believe one manager can do it all. I mean, Dr. J was a great ball player, but he wasn't the best power forward AND center AND guard. Hell, in fact, even most guards can't play one guard AND two guard equally as well.

[quote=dude]

We are not trying to beat an index, we are measured against how the client does relative to their goals. Fine. How about this thought:

[/quote]

I think this is where a lawyer would say you're assuming facts not in evidence. Also, I measure portfolios against a blended index that consists of the equivalent weightings of the sub indexes, EAFA, 400, 600, etc., not the S&P 500.

[quote=dude]

Also, how do you justify a % fee annually for sitting on the $$$. I'm going to assume if you subscribe to the above you don't hire a money manager based on how well he/she does relative to a benchmark? If you do see above.

[/quote]

I don't quite follow that, but "sitting on the money" is not something I do.

[quote=dude]

Why are we getting paid an override on an activity we are adding little value to (asset management). We should get paid for the value we are providing wouldn't you agree?

[/quote]

Again, you're assuming facts not in evidence. I simply disagree with you about the value of manager selection and monitoring, actually building the portfolio to fit the client’s needs, goals (not to mention helping the client identify and detail those goals and needs) and tolerances, tactical allocations, keeping the client from blowing himself up when the market makes him sick, etc., etc,. etc..

Dude, have you had a chance to do any work towards a CIMA designation? You might find it could change your views on a couple of these issues.

Jan 4, 2006 9:14 pm

[quote=Revealer]MPT is not "modern". Was promulgated in the 50's. Go ahead and index. Still under water after past SIX years. .[/quote]

I haven't seen a single SMA portfolio built using asset allocation or MPT underwater the last six years. Most are up 10% or more on an annualized basis.