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Is Slice and Dice approach overrated
Old 02-22-2006, 11:07 AM   #1
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Is Slice and Dice approach overrated

There are claims that a slice-and-dice portfolio would perform better than a total stock market fund. However, I am not convinced that it would perform better than a balanced fund, i.e., Welligton, STAR, Asset Allocation or some of the growth and income funds, such as Windsor II, Equity Income. May be the world is changing and therefore more international, emerging market and commodities are needed for diversification.

Any opinions?
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Re: Is Slice and Dice approach overrated
Old 02-22-2006, 11:11 AM   #2
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Re: Is Slice and Dice approach overrated

I think the problem is that you might have to wait another 20 years for enough data to accumulate to really find out.

Personally, I try to include more low correlation, positive return asset classes than just US equity and US bonds because it doesn't take a rocket scientist to see that risk adjusted return will probably be higher. Will absolute return be higher? That's a crapshoot that depends on what a narrower protfolio's contents do vs. the global pool of assets that is hopefully well represented by a slice and dice portfolio.
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Re: Is Slice and Dice approach overrated
Old 02-22-2006, 12:58 PM   #3
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Re: Is Slice and Dice approach overrated

Quote:
Originally Posted by Spanky
There are claims that a slice-and-dice portfolio would perform better than a total stock market fund. However, I am not convinced that it would perform better than a balanced fund, i.e., Welligton, STAR, Asset Allocation or some of the growth and income funds, such as Windsor II, Equity Income. May be the world is changing and therefore more international, emerging market and commodities are needed for diversification.

Any opinions?
Hi Spanky,

If you look at the data from French/Fama, they have provided info that shows that smaller size companies (mid-cap instead of large-cap, small instead of mid-cap) and value stocks provide higher returns. Therefore, a portfolio that splits evenly between large, mid and small cap, or includes exposure to value stocks, will provide a higher return than a large index fund that covers total market or is mostly comprised of large stocks.

Most, if not all, the funds you mentioned own mostly large cap stocks because they are managing tens of billions which forces them to focus on larger sizes to avoid market impact. Balanced, being part fixed income, is a different matter. You are talking about something different there - including bonds in a portfolio which can easily be done without a balanced fund. Furthermore, research shows that balanced funds do a poor job of moving into and out of equities in favor of bonds. Most times investors are better of rebalancing themselves.

I could answer the question a different way. Returns for the S&P 500 index are estimated to be real growth (historical 2.1%) plus current dividend yield (say 1.9%), less any overvaluation to revert to the mean valuation level. This could knock 1-2% annualised off the results easily (See Grantam's adjusted expected returns that take account of overvaluation at http://www.gmo.com/). There are also the matters of peak profit margins that have never been substainable and a fall will cause earnings to fall substantially & P/E multiples looking far more expensive putting capital are greater risk. Furthermore, non-expenses stock options make stated earnings inaccurate for a good portion of U.S. companies in the large-cap section of the market. Adjusted P/E multiples when accounting for stock options on valuations would shoot up. Lastly, pension allowances that affect earnings are generally too high still. If they were adjusted down to more realistic future returns, stated earnings will be lower in the future to account for this.

So there are a lot of reasons why U.S. large cap is more expensive than they appear to be. Total market isn't much different because it has a high percentage of large-cap therein. The U.S. dollar is also vulnerable. It is widely suspected that the U.S. will inflate their way out of debt. This has been causing the dollar to fall which increases inflation in the U.S. for imports and makes it a poor place for foreigners to invest too. A lot to think about.

Petey
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Re: Is Slice and Dice approach overrated
Old 02-22-2006, 03:11 PM   #4
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Re: Is Slice and Dice approach overrated

I agree with Brewer although I'm not doing a real good job of implementing it.* To much money in stock funds with a high correlation with the SP500.* Slowly changing that.

Regarding the French/Fama work, I'm not disputing either their data or their conclusions but I think that my experience is humorous and perhaps insightfull.

I first became aware of their work some time in the mid-90s and thought "great a no-brainer, no-effort way to get a return a few percent better than the market."

So what happens next?* The dot com bubble goes into high gear and the return on large growth blows away small cap and value for the next couple of years.* Of course the trend reversed in 2000 and I have been more than happy with my small cap value stocks since then.

MB

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Re: Is Slice and Dice approach overrated
Old 02-22-2006, 05:19 PM   #5
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Re: Is Slice and Dice approach overrated

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Originally Posted by mb
So what happens next? The dot com bubble goes into high gear and the return on large growth blows away small cap and value for the next couple of years. Of course the trend reversed in 2000 and I have been more than happy with my small cap value stocks since then.

MB
GMO is forecasting that large growth will outperform small growth or value. Who knows? It's much better to invest in equal proportion for each asset class.
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