It's been a while since I've "built" dumb portfolios, consisting of two ETFs, one in government bonds and one in the local stock market, each for half. It is a kind of balanced “dumb” portfolios.
They are dumb because composed of only two ETFs.
They are dumb because they are rebalanced to 50-50 the last working day of the year.
They are dumb because (for example) it must be to buy bonds of the Swiss Confederation with negative rates for half of the portfolio.
They are dumb because there is no thinking on the state of the world and the asset classes to favor.
One would understand, that for a passionate about markets and asset allocation as I am, it is not a very attractive value proposal.
But there are also advantages:
- It costs almost nothing
- It is a dumb but a very disciplined process
- The allocation is very stable; most managers destroy value by implementing too many transactions.
- It is very liquid, even if one wonders how long it would be possible to liquidate a portfolio invested in bonds of the confederation, but this remark is valid for many funds.
NET PERFORMANCES DUMB 50-50[1]
| CHF | EUR | USD |
2017 | 5.54% | 5.50% | 11.09% |
2018 | -5,29% | -6.17% | -1.39% |
2019 H1 | 11.12% | 11.15% | 11.36% |
TOTAL | 14.23% | 10.03% | 21.37% |
Annualized | 5.47% | 3.90% | 5.05% |
| CHF | EUR | USD |
Volatility | 5.80% | 7.59% | 6.41% |
A good manager should be above these results in terms of performance per unit of risk.
To maximize the probability of beating these dumb portfolios, it would be wise to adopt a semi-institutional approach, which allows to implement long term convictions without worrying about the daily noise of markets.
Pay for quality, vision and discipline
There are other things to consider when making comparisons, such as quality of service, reporting, and advice on structuring wealth and providing expertise.
Nevertheless, the question is whether the price one must pay for these services is related to the quality one receives. In my opinion, growth of capital remains the most important factor, because in the long run it makes enormous discrepancies between a good and a bad portfolio management. Capital preservation when rates are negative is a kind of joke.
There is a huge opportunity to gain market share through setting up a philosophy of capital growth through vision, long-term convictions and discipline, an ecosystem that corresponds to the philosophy of each asset management company and easy to sell. Clients don’t pay us to move their portfolios every week, because we need to show we are active. In the digital age, there are many other features that can be implemented to communicate with customers.
There is one thing I am sure of: nobody knows how to time the markets, don’t try! But I acknowledge that it took me a long time to understand that (sad).
I am convinced that we can’t continue to manage private clients wealth like we did 5, 10 or 20 years ago: a lot of transactions, a lot of poorly performing (structured) products, an addition of bets, the search for short term “opportunities”, etc., if we do, the Swiss Private Banking will be part of History in 15 years.
For those who do not know yet, transparency also happens in Private Banking, it is now possible to follow, without cost, the performances of the industry according to the risk budget.
(https://www.performance-watcher.ch/en/performance-rankings) It is a very useful working tool, which within a framework of good governance can be shared with the clients.
[1] UBS ETF (CH) – SPI® (CHF) A-dis CHF ISIN: CH0118923892
UBS ETF (CH) – SBI® Domestic Government 3-7 A-dis CHF ISIN: CH0131872431
iShares Euro Government Bond Index Fund (IE) Class D Eur ISIN: IE00BD0NC037
iShares Core MSCI EMU UCITS ETF EUR ISIN : IE00B53QG562
iShares $ Treasury Bond 3-7yr UCITS ETF ISIN: IE00B3VWN393
iShares Core S&P 500 UCITS ETF USD ISIN: IE00B5BMR087
0.2% fees per annum