Market Return Portfolio

[ranch111]

I've been given the opportunity through the firm that handles my dad's money to invest all of my retirement in a Market Return Portfolio. My money will be spread over Institutional Asset Class Funds. These funds are low cost and tax efficient. It's all based on Harry Markowitz's theoretical foundation for Market Portfolio Theory (MPT). Google it if you want to learn more.

I just recently left my job and now will rollover my 401k, possibly with the firm mentioned above along with the rest of my investments. They are a very reputable firm and my dad is very happy with his situation.

This firm charges a direct fee of .5 percent of a portfolio total value each year. The firm rebalances and reallocates the portfolio each year.

I've done ok with my investments, but reading about this investment style is very tempting to take advantage of. I'm not pushing this investment strategy but want input on what everyone on the board thinks.

Should I hand over my money or keep investing myself. If you have more questions about my situation please feel free to ask.

 

[LOL!]

You should be able to compare your DIY returns versus your father's returns. Who has the better return? Over the intermediate term? Over the long term?

OK, I read up about James Whiddon and his firm. Your market return portfolio and MPT is just another name for investing in index funds with a slice-and-dice asset allocation. I would guess that something like 50% of the folks on this message do exactly that with Vanguard index funds and an advisor fee of 0.000%. So what is the value that the 0.5% you would pay get you?

 

[ranch111]

The returns would be 14.39% averaged over time(20+ years) compared to 12.7% for a Diversified Index Portfolio. The 14.39% is the net after the .5% direct fee and mutual fund expense ratio. This is all from what I've read and not from what I know. That's why I'm aking others for opinions and experience with this.

My dad did about 18% overall last year. My 401k did poorly due to company stock. I will dump it after I roll over the 401k.
My other investments were in the 13-14% range and did pretty good.

I figured I'd be paying around 70-80k in direct fees over the next 20 years until I reach age 60. What I would be paying for is the super diversification I can't get with normal index funds, lower risk and the 14.39% return. OTOH, I could just keep my money and invest in index funds.

Thanks for the feedback.

 

[eridanus]

Past returns are not....

What mutual funds do they use? What are the ERs for those mutual funds?

How much is the consultation fee?

 

[kramer]

It sounds like you have the opportunity to use DFA funds.

There are some advantages to using DFA, which have some more specialized funds and a more solid theoretical foundation than some Vanguard funds (for instance, emerging markets go equal weight by country to avoid bubbles), but you can almost surely do better by avoiding the adviser fee. If I recall, the DFA funds themselves have higher fees, too, although they are not rip offs at all.

Also, if you have to sell existing index funds to use their funds, there will be a tax hit.

I do know something about their funds and a lot about index investing, and my recommendation to you is to learn more about investing and do this on your own and avoid their fees. Remember, you pay that .5% forever, for the rest of your life. Once you get gains in your taxable account, you are locked in for the next 50 years, as I do not believe that you can own DFA funds without an adviser.

You should be able to construct your own portfolio for a total cost of less than .2%. At a DFA firm, you are paying higher DFA fund costs plus the .5%. The higher fund costs probably pay for themselves, but I doubt that .5%. It is hard to beat low expenses in the long run. Also, you can construct your own bond portfolio with almost no expenses by buying CDs and individual treasuries.

Keep in mind that I am biased because I spent a good amount of time learning about investing. You may not be willing to do that, and there is nothing wrong with that.

Kramer

 

[LOL!]

A 19% return in 2006 for an all-equity portfolio would have been slightly under the market averages. An 18% return is good if the bond component was at least 10%. One has to make sure they are comparing apples-to-apples when it comes to asset classes and equity/fixed ratios.

I do not understand where these IACFs cannot be matched virtually to Vanguard funds and ETFs for the DIYer ... at least to within a 0.5% return a year.

 

[CCdaCE]

If we're talking funds and percentages...

If you lump sum'd at the beginning of '06, and as of 12/31/06, held a 60 domestic/40 int'l mix of Vanguard Total Stock Market/Vanguard Total International, your return would've been 19.96%,

50/50 would've been 21.08%. 40 Int'l / 50 TSM / 10 Total Bond would've been 18.84%.

These return numbers probably would be slightly off, as far as percentages since what you started with would be different than what you finished with, percentage-wise.

-CC

 

[ranch111]

Yeah, I've been thinking about doing the index thing myself and saving the fees. There is a one time fee of $1500 for them to write up a plan and construct the portfolio. After that it's the .5% fee forever. It's like a freaking car payment forever.

The difference in the amount of securities held between a DIY index portfolio and the MRP index portfolio is about 11,601. DIY indexers could hold about 3,586 securities while under the MRP it's about 15,187. This is based on an 80:20 mix. This is the biggest selling point to the whole deal. That's what I would be paying for, super-diversification.

This firm's minimum portfolio for clients is 500k. The only way I could get into this is under my dad's plan.

As to what mutual funds are in the IACF's, they represent an entire asset class. They are huge indexes, much bigger than the individual investor could invest in. Large institutions invest in these vehicles to protect their princples.

 

[unclemick]

Hmmm - my take on skimming this thread:

The 0.5% sort of pays for the discipline of rebalancing(and rebalancing bonus helps pay the fees) and administration/tax records.

So are you disciplined or is it easier to pay/let them do it. The question of niches in micro caps and corners of the international market availible to individuals I leave on the table - cause I'm not current on ETF's

heh heh heh heh - ??lazy or disciplined??

 

[justin]

The difference in the amount of securities held between a DIY index portfolio and the MRP index portfolio is about 11,601. DIY indexers could hold about 3,586 securities while under the MRP it's about 15,187. This is based on an 80:20 mix. This is the biggest selling point to the whole deal. That's what I would be paying for, super-diversification.

I think you've been "sold" on the MRP portfolio's super-diversification benefits a bit too much.

I did a quick check at vanguard - I can get you a globally diversified portfolio with just two mutual funds with around 5000 unique equities. VG total market index and VG total international index. (5,782 total equities, but there is probably a limited amount of overlap). Throw in a few more diversifiers (small cap value?) and you can probably get a few more equities. Honestly, I doubt you'll get much more return/volatility reduction from owning a few thousand additional equities beyond what you can get from a simple VG portfolio.

 

[ats5g]

ranch,

I googled institutional asset class funds and found:

Institutional Asset Class Mutual Funds: The New Paradigm

and Market Return Benchmark

A couple of comments,

1. An investor can get very low cost, low turnover, consistent portfolio allocation funds through retail fund outlets like Vanguard.

2. There is nothing new about this. James Tobin came up with the "super-diversified" portfolio idea in 1958, and subsequently won a Noble Prize [as did Markowitz for MPT].

3. As justin noted, you don't need 15,000 + stocks to be "super-diversified." Vanguard, DFA, etc, get the exact same risk and return in their asset class specific funds as those asset classes/indices even though the use sampling methods to choose stocks. So, they own the majority of the stocks in those asset classes, but don't have to buy every stock. It's much cheaper to sample as well [turnover, spreads, etc.]

4. All this mumbo jumbo is just hiding the fact that the advisor is probably investing your dad's portfolio in DFA funds, or something like it. The mumbo jumbo and return comparision's are just a way to sell the advisor's services [and fees] to clients, most of whom probably don't see through it. As is the "only institutional investors have access to this," is another great sales tactic, but nothing more than that.

Note that the portfolios constructed using DFA funds are usually more tilted towards small cap and value than Vanguard's index funds. So, when small and value outperform, the DFA portfolios will outperform. It is nothing more than this. If the advisor claims that it is something more, he/she should be able to do a regression analysis and physically show you the alpha, or value added that cannot be explained by tilts towards small and vaue.

You should choose to go with an advisor if you want someone to manage your money. There is certainly nothing wrong with it. However, don't go with an advisor if you can manage your own money effectively. You can get similar small and value tilts through index funds at Vanguard simply by increasing the %'s of Vanguard's small cap and value index funds in your portfolio.

- Alec

 

[ats5g]

btw, if you have a link to the prospectus(es) for said "Institutional Asset Class Mutual Funds" feel free to post a link. We can read through it and let you know whether the ideas are good or not our opinions.

Most mutual funds have to file prospectuses with the SEC, so you can probably find a link at EDGAR.

- Alec

 

[ranch111]

Alec,
The money would be invested in DFA funds. Just confirmed that with my dad.

http://www.dfaus.com/

He suggested to me that if I didn't feel comfortable with the direct fee management that I go and try to construct a similar portfolio through Vanguard. I think for him it's letting someone else manage his money so he can play golf and do other things. He was sick of trying to manage his portfolio. I'm not there yet.

I personally don't like payments of any kind, so this arrangement goes against my gut.

Thanks to all for the advice.

--ranch111

 

[ats5g]

You could always pay them a flat fee up front and have them suggest/build a "super efficient" portfolio of Vanguard index funds, and help you write an Investment Policy Statement. Then just manage the money yourself.

- Alec

 

[LOL!]

The money would be invested in DFA funds. Just confirmed that with my dad.

So what is the cheapest way to get DFA funds? I've seen www.evansonasset.com mentioned a couple of times with added expense ratio of 0.05% to 0.20% of your assets. Any others?

 

[Peaceful_Warrior]

If you want "super" diversification and have a ton of time, you could always go to www.FolioFN.com and create your own mutual fund portfolio for a few hundred bucks a year.

They will let you allocate any dollar amount to any stock, so you don't have to purchase whole stocks. At one point, I owned $3 worth of Berkshire Hathaway... just because I could.

 

[ats5g]

So what is the cheapest way to get DFA funds? I've seen www.evansonasset.com mentioned a couple of times with added expense ratio of 0.05% to 0.20% of your assets. Any others?

Richard Ferri's Portfolio Solutions charges a max of 0.25%. I think the min is $1,000,000. He uses Vanguard funds, ETF's, DFA funds, etc. Heck you might even get his books for free.

- Alec