ITA Wealth Management

If I were to make a recommendation to my security holding house it would go something like this.

• Set up the option to allow the investor to establish an asset allocation plan for their portfolio, much as we do in the spreadsheets for the AA-Mosaic and Mosaic2 portfolios.
• Establish appropriate benchmarks for the customer. This may be a combination of both equity and bond benchmarks or multiple benchmarks as determined by the target percentages assigned for each portfolio.
• Calculate the beta for each portfolio.
• Calculate the alpha for each portfolio.
• Calculate the sigma for each portfolio.
• From this data, determine the Information Ratio for each portfolio.
• Provide an easy method for merging multiple portfolios so one can measure the return of the portfolio compared to its appropriate benchmark.
• One should also be able to measure the alpha, sigma, Sharpe Ratio, R-Squared value, and Information Ratio for the merged portfolios.

While these requests may sound daunting, each broker house has the information to make these calculations for each and every customer.

What is in it for the security house? Why would they want to provide such a service? The bottom line is that any stock and bond security house could use the service to attract new customers. Further, such a service would help brokers work more effectively with their clients in planning and managing portfolios. Above all, the flexibility to manage portfolios in the manner would be a remarkable improvement over the current statements. 

I visualize customers establishing their own target limits just as we do in the Thomas/Lalla/Herr spreadsheet. When an asset class within the portfolio moves out of the target range, an e-mail reminder is sent to the customer warning them that one of their asset classes is out of balance. Note: It would be very important for each customer to have the flexibility to set their own target limits.

If there are like-minded readers out there, please comment on this modest proposal.

Lowell Herr

Photograph:  Your local “friendly” rodent.

Reporting on the Passive Portfolio is a regular event as this is one of the longest running portfolios I monitor.  As I recall, when I last reported on the performance results for this portfolio, the Internal Rate of Return (IRR) was 3.4% points higher than the VTSMX benchmark.  When the portfolio performance is outstripping the benchmark I know I will end up with a positive Information Ratio.  But by how much is the next question.

To keep track of the Passive Portfolio, I keep records using a software program called Captool.  Unfortunately, this software is no longer supported by the company so I am running on borrowed time with this program.  However, it is the only affordable program I know of that will calculate the Alpha and Sigma for a portfolio.  In addition, I use the Thomas/Lalla/Herr spreadsheet to give me accurate portfolio and benchmark performance results.  From Captool and the SS, I am able to glean accurate records on this portfolio.

As of 7/31/2008, the Passive Portfolio is generating a remarkable Information Ratio of 0.87.  I will put that number up against almost any money manager except the combination of Buffett-Munger.  The portfolio did lose over 10% during the last two months, a devastating blow.  Looking back over the nearly eight year record, the portfolio outperformed its VTSMX benchmark over every period examined.  That includes five-, three-, two-, and one-year periods.  This last year has been one of the most difficult for this portfolio.

The PP experienced approximately two trades per year due mainly to selling stocks contributed to the endowment fund and we did rebalance once or twice since inception.  Also, we will reinvest dividends when they grow to a sufficient percentage so as to keep commissions to a minimum.  The portfolio is skewed slightly to the value side of the equities spectrum.  This portfolio tilt was definitely the way to lean over the last eight years.  One never knows if this will change over the next five to ten years.

If anyone has questions as to the asset allocation percentages, just ask and I will try to answer all probes.

Lowell Herr

Photograph:  Carving by Howard Tibbals.