ITA Wealth Management

In 1999, I was sitting on a board of directors of a non-profit organization and the subject of a small endowment fund was brought before the group.  A national bank was managing this account for a service charge of 1%.  The bank was charging 1% of the fund to farm it out to three mutual funds, own and managed by the bank.  Each of these funds were charging another 1% for their services.  I objected to this 2% charge, particularly when I looked up the performance of the mutual funds on Morningstar and found they were mediocre, at best.  When asked for a suggestion as to what might be done with this small endowment fund, I suggested we convert it to a totally passive style of investing and populate the portfolio with Exchange Traded Funds (ETFs).

The account was moved to a discount broker and the mutual funds were sold.  On 12/01/1999 the passive account was launched using a variety of iShares.  At the time we started this passive portfolio (PP) Vanguard did not have ETFs.

Since late 1999, the PP has a negative IRR of 1.7% (-1.7%) while the Vanguard Total Market Index, VTSMX is even lower at  a negative 3.6% (-3.6%).  The S&P is still lower at -4.6%. Remember, this portfolio has been in operation over what we call “The Lost Decade” due to extremely poor management of the country.

Included in this post is a clip from a spreadsheet showing the projected annual return and the projected risk of this portfolio.  Note the portfolio is not all that well diversified (DM = 30%) even though the iShares cover the entire U.S. equities spectrum as well as REITs and international asset classes.  We still have a little cash to invest in asset classes that are under target, although all asset classes are within our acceptable target limits.

Let me point out one very important relationship in the attached clip.  Note that the projected annual return is to be 8.95% and the historical return was -11.66%.  When the projected return is greater than the historical return and the percentage difference is as large as we see it right now, using reversion-to-the-mean logic, there is a high probability we will see positive returns for this portfolio in the future.

Portfolio tracking, measuring performance vs. a benchmark, and running QPP portfolio analysis is what we do with seven portfolios over on the Premium side of this blog.

This portfolio has a positive Information Ratio, something that is very unusual in the world of investing.

If anyone has questions, be sure to post them in the comments section and I will try to answer as soon as possible.

Lowell Herr

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