Author: John Gerard Lewis, Gerard Wealth
Covestor model: Stable High Yield
Some of the nearly 80 model portfolios managed by professionals on Covestor have performed mind-numblingly well since their inception dates. As of this writing (12/5/11), we’re talking numbers like 140% or so over three years for one heady manager. Some other of these sharp dudes have finessed returns of around 50% over 14 months, 40% over 20 months and 30% over 17 months.*
Sheesh, what kind of money management royalty are we competing with here? As of this date, our Stable High-Yield model shows a seemingly paltry 2.56% return since inception.
But hold on a minute. Let’s salve these wounds to our self-esteem with the medicinal extract of a 30-year investing career. Listen up, whippersnappers.
First of all, our inception date was July 8, 2011, just five months ago. During that period, the S&P 500 index was down more than 6%. Thus, our portfolio has done about 8% better.
Further, although we measure our model directly against the S&P 500, it does not consist of comparable investments, because we use a collection of high-yielding securities to propel our returns. That means an evaluation of our performance, more so than that of any given stock portfolio that might suddenly get hot, requires time. In other words, we need our series of juicy quarterly dividends to kick in.
To that kettle of high yielders we have added a nearly equivalent portion of short-term bond ETFs, to inhibit volatility.
The result is a portfolio that has returned 2.56% during a five-month decline in the market, after having benefited from just a single quarterly dividend period, and that enjoys a current beta of 0.26 – meaning that it is anticipated to be 74% less volatile than the market.
We like every bit of that. So yes, our highfalutin brethren at the top of the rankings boast well-deserved, eye-popping “since inception” returns. But some of those tony models have eye-popping betas as well. One model has, as of this date, a beta of 2.87, meaning that it is expected to be 187% more volatile than the market. Yikes!
If you’re inclined to tumble around in those turbulent waters, go for it. But that’s precisely what we don’t want to do. Instead, during this soul-sapping, secular bear market, we’re trying to achieve a performance that approximates the historical return of the stock market, without taking significant risk. We think we’re doing that. And that’s not bad during a bear market, especially for a low-volatility model.
*Opportunistic Arbitrage from Stone Fox Capital; Small Cap from Gator Capital; Small Cap Growth from AlphaMark Advisors; Russell 3000 Long Only from U.S. Wealth Group
