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Why "dumb"can be useful

Reminder

Three portfolios in CHF, EUR and USD, 50% invested in the local equity market and 50% in local government treasury bills (3-7 years). They are rebalanced once a year, on the last working day. There is a 0.2% annual fee.


Why "dumb"?

They are called "dumb" because there is no need to do a lot of thinking to design them, and also "dumb" because buying government bonds with negative or zero yield doesn't make much sense nowadays.


With qualities

However, even "dumb", they have three fundamental qualities that must be the basis of any good portfolio management. They are disciplined, systematic, and they optimize costs (ETFs + 1 buy and 1 sell transactions per year).


For what purpose?

It is a simple measure of quality. It can be used, for example, as a tool to monitor one's risk budget, and compare the performance per unit of risk of the managed portfolios against that of the "dumb".


Mind the lack of humility

These portfolios should be easy to beat for a similar risk budget. However, managers who put forward their abilities in terms of "timing", "dynamism", "agility", tend to have disappointing risk-adjusted returns, as this means that portfolios are subject to too much turnover.

Other sources of underperformance are: high costs, bad governance, lack of discipline, and poor implementation using inappropriate investment vehicles.


Be smart!

To easily beat "dumb" portfolios with a similar risk budget, it is better to have a time horizon of several years. This is the only way to capture an asset’s economic rent. Funnily, when it comes to multi-asset portfolios and investment, the best managers are often boring because their vision doesn't change every month! Contrary to popular belief, there are NEVER any investment decisions to be made in a hurry when managing “long only” and unleveraged portfolios.


Results

As everyone knows, the first half of the year was characterized by wild volatility. After one of the worst quarters in the post-war period, it was followed by one of the best. No one could have predicted it. Only those who were able to escape the noise of the markets, did well for the first six months.

The Euro portfolio was harder hit. In Europe, equities fell more than in Switzerland and the USA, and government bonds (3-7 years) delivered only 0.5% performance over the six months.



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