ITA Wealth Management

There is a large body of academic research that confirms the existence of a value premium when it comes to constructing a portfolio. While some investors are willing to build a portfolio using Vanguard’s VFINX and one or two other broad indexes, to do so means giving up the potential of adding alpha to the portfolio by using the value premium. For this reason, we prefer to break the market up into numerous asset classes so as to take advantage of what history teaches us.

Let me extract data from a passive portfolio (PP) that has been in operation since late 2000. This PP was built around Barclay’s iShares as Vanguard was not in the business of ETFs when this portfolio started. Here is data showing why we want to take advantage of the value premium.

• Large-Cap Value = 15.3% (all values are annualized)
• Large-Cap Growth = 2%
• Mid-Cap Value = 22.6%
• Mid-Cap Growth = 8.1%
• Small-Cap Value = 7.8%
• Small-Cap Growth = 9.3%

Only in the small-cap asset classes did growth outperform value, and that only changed during the recent bear market.

By their very nature, cap-weighted index funds are growth oriented so we counter this structure by increasing the percentage we target for the value asset classes. All the asset allocation targets for the three portfolios under construction are available over on the Premium Content side of the blog.

Do to the value tilt, the PP is outperforming the VTSMX benchmark by 3.5 percentage points annualized.

Lowell Herr

Another portfolio I track is the C&D Portfolio. The percentage allocations are skewed slightly to the value side and the goal is to have 20% in international and 15% in emerging markets. Only 3% is allocated to commodities at this time and the portfolio holds no bonds, and there are no plans to do so.

I’ve only been working with this portfolio since September 1, 2005, so it too is a relatively young portfolio. So far, the portfolio IRR is ahead of the VTSMX benchmark by a very modest 0.2% point. At one time the portfolio was behind the benchmark by approximately 6% points. I sold most of the stock holdings and built a diversified portfolio using index or ETFs. While the portfolio is not yet in balance, it is slowly getting there. The results are rewarding, even in this very poor market.

If there is interest in the asset allocation breakdown, just ask in the comments section.

Lowell Herr

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