No, it’s not intense at all. Their portfolio manager is basically Windows Vista. They have no fundamental reason for investing in stock A vs stock B. If you got one of their PMs (an actual human) on the phone and asked what their investment thesis is for owning their top overweight, he wouldn’t have anything to say about it. They construct their portfolios based on multifactor models. It’s the definition of a quantitative mutual fund.
They spell out their process here:
@STL - I think we have extremely differing views on investing, but that’s another thread entirely…
@Sys - In another thread, I asked about using HD Vest. Is this similar to one of your TAMP’s? People said that compliance really isn’t that big of a deal. (I have no idea–I’ve never worked in a small RIA. I worked for Ameripoff and Morgan Stanley.)
Not sure why another thread is necessary. What are your views? I’m certainly a fan of active management, as anyone with a CFA should be. You mentioned using Davis NY Venture so I’m assuming you’d incorporate some sort of active management as well. Are you suggesting we would approach asset allocation differently? Maybe, but I wouldn’t be so sure. I’m just representing the industry norm.
Sidebar: Incorporating some passive investments isn’t such a bad idea. Many advisors/consultants are recommending indexing the large cap space since it’s so tough to beat the index over time. In general, that space is just too efficient. But, there’s tons of information on why you should use active management in your domestic small caps, fixed income, and international spaces. It doesn’t have to be completely passive or active.
In general, I think it’s more important to capture beta, not alpha. Granted, I am a fan of some active management. I do like Davis, Dodge and Cox, and Royce funds. Other than that, I haven’t found a lot of funds that I really like. (Low fees, low turnover, value tilt.)
For the vast majority of individuals, you should have a four-fund max. That is, you should be able to achieve the desired risk/return using only four funds. The more funds/managers you start adding, the more homogenous your risk/return becomes, and it adds additional complexity with no added benefit.
90% of your return comes solely from your allocation to equities.
Assuming you’re not 100% invested in stocks, you can somewhat control your volatility by buying when stocks are low, and selling when stocks are high. (Assuming low transactions costs, that is.) Controlling your own volatility is preferable to “picking and sticking” to an asset allocation.
(I’m sure I could think of more, but these just pop out at me.)
This is an interesting idea, but you can’t run a business like that. If you mocked up a portfolio with four funds in it for a prospective client and they took it to a competitor for a second opinion you’d get eviscerated. Even the advisors that like to only go with “best in breed” ideas still have at least 10 funds in an average 60/40 portfolio. And that’s considered fairly concentrated.
If you’re thinking about how you want to run your book, you need to be aware of what the corner office guy at Merrill is doing…or the RIA down the street for that matter. And, how do you think a client is going to react to paying you a fee for setting them up in four funds and calling it a day?
^I’m pretty aware of what the corner office guy at Merrill is doing. (I see the client’s brokerage statements, because I need them to do the tax return. Remember?)
And I’m well aware than most advisors put people into a basket of front-loaded A-share, American Funds mutual funds. (Again–I do lots of tax returns. I see lots of brokerage statements.) They get GDC of 5.75% and a .25% trail. But my point is this–sales charges aside, how well does it perform? In my opinion, if you were to carefully select all the “best in breed” managers and allocate your equities to 10 different funds, you’d still perform no better than if you put 1/3 in a large domestic blend, 1/3 in a large foreign blend, and 1/3 in a small-mid global fund. (Or however you want to slice the pie–this is just an example.)
And I’m not sure I’d get eviscerated. (Had to look that one up, BTW.) Just because the guy’s model is more complex doesn’t necessarily make it better. He may have technical indicators/bollinger bands/market heat maps/industry intelligence from top analysts and economists, but I’m fairly convinced that most of these things (about 99%) are a bunch of fluff, and are generally useless to most individual investors.
Another Greenman “truism” - control what you can, and don’t worry about what you can’t. That is–you can control costs. You can’t control the market. If corner-office-dude charges 1% and I charge .5%, then all of his fancy tools have to generate an extra .5% just to break even. Pretty tall order, since his funds are also charging an extra .25% to generate a trail for him. (This is assuming that the fund expense ratios are the same, aside from the 12b-1 fees. In reality, I try to find low-cost funds, or ETF’s.)
Plus, as noted in another thread–I have other tools besides asset management. I have the tax code, entity structure, estate planning, gift tax planning, etc. etc. that corner-office-dude doesn’t have. (In fact, corner-office-dude actually asks our firm to sit in on meetings and do most of his client’s asset distribution planning. No joke. So this might actually be a very real challenge–the brokers are a very lucrative source of referrals.)
That’s all well and good…I’ll just leave you with this. Being a successful advisor isn’t about providing the best returns for your clients over the next 30 years. It’s about providing them with the best experience possible. Did you save them money during that last bear market? Are they invested in something that’s exciting enough to brag to their friends about? You don’t have to be wild and crazy, but you have to offer your clients something they can’t get by reading Investing for Dummies. The best advisors I know keep their clients engaged.
If your value prop is simplicity and low cost, all I have to do as your competitor is remind your client that these are complicated times. In the last 15 years we’ve had two major market crashes, huge corporate accounting scandels, a gigantic ponzi scheme, and the government printing free money with who-know-what consequences brewing down the road. Do you feel safe having your entire nest egg in four funds? How about we diversify to be sure no one thing can wipe out a quarter of your portolio.
I know that doesn’t even make much sense, but the average retail client doesn’t know any better and that’s what your competitors are going to tell them. That’s where the metaphorical disembowelment comes from.
^Not trying to be argumentative, but it sounds like you’re tacitly agreeing with me, and that you don’t even believe what you’re spewing.
My portfolio has four holdings in it: Dodge and Cox Stock fund, Dodge and Cox International, Dodge and Cox Income fund, and Royce Primier. Together, they have 234 stock holdings and 707 bond holdings. (And I don’t think any of them are duplicated.) No one thing will wipe out a quarter of my portfolio.
And yes, clients can read Investing for Dummies. But they don’t want to. They can also read Taxes for Dummies and Estate Planning for Dummies. But they don’t want to. They want to hire somebody to do it and get back to running their businesses.
But I get your point–success as an advisor is less about what works and more about what you can convince the client of. Is that what you’re saying? Do you think that IRL my business model will ultimately fail?
In the nicest way possible…
…and I mean NICEST…
LOL Greenie! You’re going to get laughed out of the business, you think a guy is going to give you $10mm for you to buy 4 mutual funds for him? Fuark bro, that’s a good one… that might fly for his UTMA but at some point you have to do something a slightly retarded monkey can’t do on his own. What if Small Cap stocks trade at 30% lower P/E’s than large and you want in, are you going to go call the PM at Dodge & Cox and tell him to buy some small caps or are you going to buy Vanguard US Small Cap for your clients yourself? Or tell Bill Gross that your clients need a duration of 2.5 so he needs to short some treasuries?
The way DFA works, they’ve divided the market into Large, Small, Value, Blend, and Growth… you combine these to target your specific allocation. (You can buy a “core” fund than add to that if you want). Most DFA shops probably use 10-15 funds per portfolio.
BTW, 234 stocks holdings is nothing… a lot of ppl own that in 1 asset class.
I’ve actually met most the people in that video… you’re just gonna have to trust me on this one, these multi-factor models just mean that different risks explain the sources of returns. They arent quant/blackbox models that recommend what to buy and sell. It really means they overweight Small and Value stocks because they’re riskier and have higher returns, these models are simple statistics used to prove the risk/reward story- I know you think that’s quant, but its not. The data is avaible on Ken French’s website:
http://mba.tuck.dartmouth.edu/pages/faculty/ken.french/data_library/f-f_factors.html
@sys - I think we’re only disagreeing on the definition of what a quant shop is. I know guys at DFA too, and they sell it as a quantitative process; one that eliminates “human” biases. In the 40 Act world there are really only two types of philosophies - fundamental and quantitative. DFA doesn’t have single fundamental (neither top-down nor bottom-up) investment thesis on any of the names they own. They build their models based on what a computer spits out. For the purposes of my world, that’s text book quant. They overweight value and the computer tells them how to build a portfolio with a value tilt. That’s the gist of it. Anytime you see “multifactor model” used in the process, that’s a quant fund.
This kind of reminds me of a conversation I had with an analyst on one of our large growth funds. A few years ago they really changed up the process to rely heavily on Barra to build a portfolio with limited factor bets. It’s got to the point they eliminate and add stocks based on where they want their factor tilts. They still believe it’s a fundamental process (because what analyst wants to admit a computer is picking their stocks?) but the reality is we have to sell it as a quant process now. (And, btw, the fund has done well since they made the change in process. Quant funds are very capable products.)
It’s the same with DFA. They can’t sell it as an index, because they do take active bets; they can’t sell it as fundamental since they do no fundamental work; so what would you call it?
@greenie - re: “do you think IRL this will fail?” YES. Sorry bro, but not only is it a really bad business plan, the more I think about it, you’d open yourself up to all sorts of lawsuits for breech of fiduciary duty. But, I think you’d find out really fast you’ll need a couple dozen funds in your bullpen anyway because all your clients will have different needs. You’ll have one that wants tax-free income so you’ll have to buy a muni fund and maybe a high-yield muni fund. Maybe they live in California and you need a state specific muni fund too. That’s just an example, but you’ll find that four funds isn’t going to cut it in a practical sense, nor will it be competitive.
No offense taken, bro. I’m asking for constructive criticism, and you’re giving it. I appreciate it. I still don’t necessarily agree with you, but I like the dialogue.
@Sys - If you want more exposure to small-cap and less to large-cap, then…(wait for it)…sell LC and buy SC. You don’t need to call the fund manager. That’s what the “buy” and “sell” buttons are for.
And in the world of private wealth, I don’t know that I’d ever calculate what duration I would need. I might use some generalities, like “I want long-term corporate” or “short-term government” depending on the situation, but to say “I need a duration of 3.825” in a private wealth situation seems to be overkill.
And you said that you know people with 234 stocks in one asset class. I think we can both agree that more =/= better. Yes, you need a sufficient number to achieve basic unsystematic diversification, but 234 stocks (presumably scattered across the economical/geographical spectrum) should most certainly do the job.
@STL - When I said “four-fund max”, that’s the holding for any client’s portfolio. That doesn’t mean those four specific funds. Yes–you would need muni bond funds, government bond funds, emerging market funds, REIT funds, etc. But any given person only needs to own four funds. It’s far easier to own one large-cap global fund than to own a LC domestic value, a LC domestic growth, a LC foreign value, and a LC foreign growth. And it should perform just as well.
By the way–I’ll probably have very few, if any, clients with $10m or more in investable assets. The clients have that much net worth, but most of it is tied up in their businesses (which is why they’re wealthy to begin with). And if I did get somebody with $50m in investable assets, they’d have to understand the model and it simplicity. If they didn’t accept it, then I’d send them to my buddy at US Trust.
Serious question, why even bother with four funds? Why not a single target date or target risk fund? If you’re really going for low fees and simplicity that would be the way to go.
Edit: What would you recommend for a 35 year old with $250k to invest in an 80/20 portfolio? I’m really curious how you could cover everything with four funds.
Never heard of a “target risk fund”. Can you give me an example?
I stated in another thread–I don’t like target date funds because I don’t have any control over the allocation. If, for example, I wanted to be 50-50 stocks/bonds, and the fund is 80-20 stocks/bonds, then I can’t control it. If I hold two funds, I can just sell some of the stocks and buy bonds.
Plus, like Sys said, if I see a real buying opportunity some area of the market (say the Euro is at an all-time low and I expect it to appreciate) then I can buy European stocks. Can’t do that with a target date fund.
Yeah, that would be low fee and simple, but a little too simple, even for a simple-minded guy like me.
EDIT - How would I allocate $250k to four funds, trying to get 80/20? 50k to Dodge and Cox Income, 125k to Dodge and Cox Global, 50k to Royce Premier (or another small/mid cap blend, with some foreign exposure), and 25k to some diversified emerging markets stock fund.
To note–I don’t really know all the fees associated with buying into the funds. If they charge a 1% redemption fee every time you sell, that might change my thinking. Then I’d have to go with ETFs, and I don’t know if there is such a thing as a “global mid/small ETF”.
Seriously, you should’ve been a lil offended… I was kinda being a d!ck, sorry about that, haha.
My point was if you have 1 US equity manager, you have no control over small vs large and you can’t hit the buy and sell buttons. The fund companies don’t make asset allocation decisions for you, the just give you the ingredients… you should be artfully crafting a meal that your clients couldn’t cook for themselves. They either need to get value from you, or perceive value. In the best interest of your children, I strongly suggest you give them as much of both as possible. And you are going to want to manage duration just like you did on your example above. The fund manners are going to manage around the Barclays, or WGBI, and you need to manage them to meet your clients needs.
I guess what sweep and I are telling you, is buy 10+ damn funds. Also, there’s no way your turning down a guy with $50mm because he doesn’t understand your business model. That’s several years of net flows for most advisors… if that guy says jump, you say “how high”
I think sweep is an external wholesaler. I used to work an RIA with a few billion in assets. Also, start reading riabiz.com to learn about the industry. Also, I’ve never heard of your weird custodian you posted above. DFA won’t be on their platform, they’re on very few. Your best bet is tda they’re kind of the up and comer for custodians and have reasonable trading costs.
I’m not on the retail side anymore. I work on the key account/institutional sales.
Thanks for the feedback, Sys. I appreciate the ideas from both you and STL.
They’re similar to target date funds, but they have a static allocation to stocks and bonds providing the investor with a target risk allocation. Generally people with small account balances use them. For example, if you’re working with a client and their kid has $10,000 to invest you might put it in an “Aggressive” target risk fund, instead of buying several mutual funds. See the link for Vanguard’s example:
https://personal.vanguard.com/us/funds/vanguard/LifeStrategyList
My main problem with this is you’re basically market timing, which is nearly universally agreed to be impossible. Instead of maintaining a strategic weight to all the various asset classes by purchasing a dozen or so mutual funds/ETFs, you’re waiting to make very sizable shifts among a few funds based on your outlook (which is likely wrong {nothing personal, just a good bet}). There’s nothing wrong with making tactical moves by overweighting/underweighting asset classes, but every advisor I’ve ever worked with maintains some sort of strategic weight so they don’t miss the initial move - which is normally the biggest.
If you brought this to me, I’d have serious reservations about manager risk (70% of my funds being in D&C) and I don’t think you’re covering all the asset classes adequately. No TIPS or really any inflation hedge what so ever, very little emerging market equities, basically no small/mid international stock, no emerging market debt, no international debt outside of the UK, no alternatives, very little REIT exposure, (Royce is closed to new investors); and a single small/mid domestic can’t adequately cover small value and mid growth at the same time (historically two of the best performing asset classes). And, after 2008 I would never put all my fixed income money in a single bond fund. Much too much manager risk.
This is what Sys and I are talking about. You can’t cover everything with four funds. All it takes is one other advisor to point out all these holes and you’ll lose your clients.
For RIAs there really aren’t any fees to buy into mutual funds. There’s no load - either front or back-end - and you’ll normally only find redemption fees on relatively illiquid asset classes like emerging markets. But, you do have to hold mutual funds for at least 30 days. You’re not supposed to actively trade them. We flag RIAs/advisors all the time for making “round-trips” in and out of our funds. Every fund company does this. That’s another reason to have a strategic weighting across a dozen or so funds and then tactically manage around them.
All of the above said, I’m not bashing your choices or your possible return profile. Looking backwards this would have been a very successful portoflio over the last 10 years. But, that’s not the way it works. Ask yourself this, if this is a good strategy how come it’s not already popular among advisors?
^Okay, I have heard of “target risk” funds. I’ve just never heard them called that.
About market timing - I’m not saying I would sell all of my other assets and shift into 100% European stocks. But instead of being 50/50 US/International, I might shave off 10% of US, so I’m 40/60. The “core” is still fundamentally the same, so I’m only changing on the margin. I’m not sure how this is fundamentally different than tactical asset allocation.
Why do you say these?
Again, I’m not sure that you have to fill up each “asset bucket”. If I had 40 different funds that included a fund for each part of the US stylebox, the International developed stylebox, the emerging markets (both large and small), the Frontier markets, growth REITs, income REITS, commodities, managed futures, MLP’s, and all the million different types of bonds out there, I’m not sure that this extremely complex and difficult-to-manage portfolio would perform any better than the simple four-fund one.
If I really thought that there were a benefit (either to myself or to the client) for complicating their portfolio to include 40 different funds, then I would consider it (and consider whether I could actually run the shop, in addition to the tax and valuation practice). But I think it’s just added complexity with no benefit. And just saying, “Well, this is how UBS and Morgan do it” isn’t enough to convince me.
Because the industry is really really really good at selling crap to unaware clients. And people are taught that “you get what you pay for” (which I believe to be untrue in investing) and “practice makes perfect” (which I also believe to be untrue in investing). And it’s human nature to want to come up with complicated answers to simple problems.
EG - if you manage John Doe’s portfolio, you might charge 1% of assets and put him in 80 different funds and ETF’s, and monitor his portfolio on a daily basis. I would charge .5%, and put him in four funds and check it once a year. And everything John Doe has ever been taught tells him that he’ll get more “bang for his buck” by going to STL, when I think the empirical evidence says otherwise.
Again, I don’t want to be argumentative or intransigent. I’m really trying to get input, so I can decide whether I need to change the way I think, or whether I should abandon the idea of adding investment management to the accounting practice.
And I don’t want to sell a bunch of shit just to line my own pockets with gold. I’ve seen too many dodgy advisors who do that. I’ve actually been told (by my manager at Morgan Stanley) that we couldn’t sell index funds or ETF’s, because it would be hard to justify a 1% fee on them. He acknowledged the fact that they outperformed most actively-managed funds, but told me that my job was to sell financial products, and index funds just weren’t “hot” enough for clients.