Back with some food for thoughts with my nagging dumb portfolios.
Reminder
There are three portfolios in CHF, EUR, and USD. Each is composed of two ETFs, one in local equities and one in local government bonds with maturities of 3 to 7 years. At the beginning of each year, the two ETFs represent 50% of the total portfolio value. Therefore, there are only two transactions to be made per year. The risk profile of a dumb portfolio corresponds to the risk profile of a balanced portfolio that is common in the Swiss private banking industry.
Even if everyone can easily replicate this strategy, it is not an investment recommendation but more a "gauge" to assess the quality of discretionary management in Switzerland (and elsewhere).
Why dumb
These portfolios do not require any specific expertise; anyone could replicate them on available banking platforms. There is no international diversification. There is no story to tell because they are not dependent on market forecasts. They are Pavlovian: you start over with the same allocation and the same two ETFs every year. In short, they are not sexy.
However, these portfolios have qualities: disciplined, transparent, and systematic. They cost only a few hundred francs per year (200 francs or less in custody fees, and there are two stock market transactions); we can consider it a low-cost portfolio management proposal. It should be easy to beat, right?
Here are the results:
Performances are net of fees (0.2% per year).
2021 has been as an excellent year. The dumb in dollar achieves a third consecutive year with a double-digit performance. It was better not to diversify investments in foreign markets in Uncle Sam's currency. The dumb took full advantage of this. The risk of portfolios with 50% equity at the beginning of the year is slightly higher than so-called "balanced" portfolios. It must be taken into consideration when making comparisons.
Main takeaways
For the last six year, the dumb portfolios perfectly fulfilled their role and remunerated their investors within the framework of a secular equity bull market.
As you can see, one doesn't have to use many resources to obtain acceptable results. Professionals should do better for the same risk budget.
These portfolios are sustainable because they minimize the number of transactions. After all, it is about investing and not speculating. However, the ESG profile of the portfolios could improve by choosing 6 ETFs with good ESG ratings (only one is).
It is important to remember that a good portfolio manager is not a fortune teller and that any forecast within one year has a 99.9% chance of being wrong. We may wonder why so many financial institutions put so much effort into something useless. Rather than anticipating the next market move, it is better to try to understand the investment regime, as it usually lasts for several years.
At the risk of repeating myself, delivering good, consistent risk-adjusted performance requires a thorough, disciplined, and documented investment process. One needs to spend time on portfolio construction and isolate herself from market noise. The choice of investment vehicles that allow portfolios to be invested must also meet a precise set of criteria.
Finally, the best-performing portfolios are subject to minimal movement. If the portfolio changes frequently, there is a problem with the investment process. Fewer transactions mean better performance, and it's also sustainable.
If one gives a management mandate to a banker, it is also her responsibility to ensure that the banker delivers according to expectations.
There is a price to pay for quality. But, for poor results, a minor commission is already too high!
The best financial institutions provide full transparency on the fees generated by the management, whether charged directly or through products or forex. When it isn't offered, it is essential to ask for it.
There is a platform for private clients and professionals. It is called Performance Watcher (www.performance-watcher.ch). It is an easy-to-use tool and free of charge for the basic client version.
Be disciplined, and Happy New Year.