So here we sit, hovering around record stock market highs, so there’s no reason to have any regrets, right? Well, probably not, unless you somehow managed to lag the market indexes over the past year. And why should that misfortune befall anyone? Good grief, all you had to do was stick your money in a broad-based index fund and forget about it. Sheesh, any imbecile can do that.
But imbeciles, being imbeciles, are fully capable of screwing that up. Indeed, my own Stable High Yield model at Covestor actually did underperform the market over the past 12 months.
But I’m not just any imbecile. I’m an imbecile with a plan. And that plan is actually working quite well. Allow me to explain.
Stable High Yield has a one-year return of 12.2%, net of fees (as of March 12), lagging the S&P 500’s return of 13.2%. This comparison would seem to validate the oft-heard assertion that most professional money managers underperform the market. But I’m not the least bit disappointed by my own underperformance.
First of all, 12 months is a no more relevant span of time than any other for purposes of measuring investment performance. Oh, there’s the popular appeal one-year performance, just as there is for three-year, five-year and 15-year. But to an investor in a fund or to a subscriber of a Covestor model, what replicative effect do those particular time spans have unless the investor were invested for precisely those periods?
In other words, Fund A may have a five-year annualized return of 14%, but if you happened to have held it for only a portion of that five years you may have only gained 7%, or 3%, or perhaps even lost money on your holding.
Now, this is not an advocacy piece for buying-and-holding, and it’s certainly not one for market timing. Rather, it’s meant to merely provide perspective on portfolio-specific historical assessment.
Moreover, evaluating the performance of a managed portfolio for any given segment of time is a manipulated exercise, fraught with massaged vagaries and always, always, imbued by its sponsor with certain, shall we say, “cherry-picking” inclinations. After all, unless one’s name is Nicolas Cage or Willie Nelson, anyone can find a slice of time when he was the most brilliant of investors (see also: baseball great Lenny Dykstra).
So how does one best analyze the performance of a portfolio? Well, except for those that are by charter term-bound (short-term funds, intermediate funds, etc.), it seems to me that the most objective period of time for purposes of comparison would be the longest available, i.e., “since inception.” It levels the playing field among the portfolios being compared.
It is for that reason that I’m not at all disturbed by the underperformance of the model over the past 12 months, because since its inception in July 2011 it has beaten the S&P 500 by 44% (12.2%, net of fees vs. 8.5%, as of March 12, 2013). Plus, it has done this with a beta of 0.24 vs. the S&P 500, meaning it is 76% less volatile than that index.
To put this “since inception” way of thinking into perspective, let’s take a look at one of today’s top-performing, professionally-managed models at Covestor. (As I’m loath to impugn any colleague, and because the information is easily found anyway at Covestor.com, I’ll not identify it.)
Over the past 12 months that model is up 35.5% net of fees, ranking near the top of those managed by the 76 professionals. But over its lifetime, which began in January 2010, it has actually underperformed the S&P 500 by 79%.
To further illustrate how selective analysis can skew general perception, consider again that my Stable High Yield fund is a percentage point below the S&P 500 for the past 12 months. It underperformed; that is, it underperformed if any given investor subscribed to the model on March 13, 2012 and is still holding it today.
But that’s an unfair and arbitrary context. Instead, to objectively compare performance, on at least a somewhat apples-to-apples basis, one should look at the performance since inception, a period during which Stable High Yield has outperformed the S&P 500 by a healthy 44%. That’s better than the aforementioned model and each of the other two that sit atop the one-year ranking.
Since inception is, I believe, the fairest way to compare portfolio performance, and it’s especially optimal for evaluating a portfolio that is expressly designed exclusively for long-term results, e.g., the Stable High Yield model.
Oh, I know. Go ahead and say it: “Since inception” is self-serving, too. I just cherry-picked it.
All data is current as of March 12, 2013. The investments discussed are held in client accounts as of February 28, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.