Bernstein's Small Investor Cowards Equity Index

[Running_Man]

I have been trying to review portfolios that would be held over a prolonged period of time from proponents of passive investing, to see if they pass muster over time. With the S&P500 10 year return now at 3.99 percent most of passive investors continually are changing their reccomended asset allocation, which to me is no different than back testing.

In September 1996 Bernstein suggested on his website The Efficient Frontier what he called the Small Investor's Coward's Equity Index. This was investments in the following funds:

20% Vanguard Index Trust 500 (3.99)
20% Vanguard Small Cap Index Fund (6.17)
15% Vanguard European Index Portfolio (7.31)
7% Vanguard Pacific Index Portfolio (4.94)
8% Vanguard Emerging Markets Index Portfolio (13.80)
5% Scudder Latin America Fund (15.54)
12.5% Tweedy Browne Global Value Fund (9.96)
12.5 % Acorn International Fund (14.95)


I took the 10 year average annual returns for each of the funds - listed in parenths to the right and weighted for the portfolio percentages proposed and came up with a 10 year performance of 8.40, which is not too shabby actually. But if you divide his portfolio into index and manged funds the managed funds Scudder, Tweedy and Acorn averaged (based on his suggested weightings) 12.72 percent while the passive index funds averaged 6.54 percent. So that the performance to beat the 10 year government bond (which offered a 5.54 percent yield in January 1998 by a passive investment guru was mostly due to a managed portfolio gains.

 

[LOL!]

Unfortunately, I don't think one can take such a portfolio and compute the return from the average return of the components. The reason is that one should be doing tax-loss harvesting and rebalancing (especially rebalancing) throughout the backtest period.

In other words, using passively managed index funds is still not the same as a buy-and-hold set-it-and-forget-it mentality. The portfolio still needs to be managed.

 

[samclem]

5% Scudder Latin America Fund (15.54)
12.5% Tweedy Browne Global Value Fund (9.96)
12.5 % Acorn International Fund (14.95)

So that the performance to beat the 10 year government bond (which offered a 5.54 percent yield in January 1998 by a passive investment guru was mostly due to a managed portfolio gains.

Is it at least possible that the high returns of these funds is because the sectors they are invested in did very well, and has nothing to do with active vs index?

Here are some surrogates that are indexes. They aren't a perfect match, but they are fair comparisons:

Tweedy Brown Global value Fund (9.96 % gain) --> Vanguard Intl Value Fund (8.96% over the last 10 years)

Scudder Latin Am (15.54%) --> MSCI EM Lat Am ID Index (as of 31 Jan 08)= 14.83%m (index performance, so no fees)

Acorn Int ->> ??

So, where I could find indexes/index funds, they were within a point of the return of the managed funds. At least at first glance, they performed relatively well compared to the other holdings in Bernstein's sample portfolio primarily because of the sectors in which these funds were invested, not due to superb stock picking, etc.