• Home
  • About
  • Services
  • Contact
  • Media

Advisory Craft – A Case For SOME Active Management

Posted April 21, 2016 by Denis Smirnov

At Gordian Advisors we are big proponents of passive investing or indexing. However, there are several asset classes where we prefer to use active managers. Once such area is Foreign Large Blend category which invests in international companies based in developed markets.

We use a 50/50 combination of two actively-managed funds: Oakmark International (OAKIX) and First Eagle Overseas (SGOVX). To evaluate these funds we are going to compare them to Vanguard Developed Markets Index (VTMGX) as a benchmark – it’s a very close approximation of EFA but has two extra years of history. Exhibit 1 shows performance of these funds vs. the benchmark going back to 2000.

47-1

Both First Eagle and Oakmark are distinctive funds with very different investment strategies. However, combining them into a 50/50 portfolio creates several advantages:

• Zig vs. Zag – Typically these funds do better or worse than the index in different years. First Eagle tends to outperform when the market is not doing great as it carries sizable cash and gold positions. Oakmark, on the other hand, tends to rip to the upside when market is doing well. In fact, 2007 was the only year in our sample they both did worse than the index leading to really a tough year for the combo.

• Smoother ride – 50/50 portfolio underperformed VGTSX 17% of the years (3 out of 17), about half the time either fund lagged. It also dampened best and worst years taking the edge off the swings.

• Correlation – Another useful feature is increased correlation with the index. We actually do want to have high correlation with the asset class benchmark since it provides predictable behavior & diversification benefits within the larger portfolio.

• Investor Psychology – it makes it easier to stay invested in both funds. For example, Oakmark hasn’t been keeping pace in the past 2-3 years. However, since the combo is still doing better than the index, it reduces the temptation to sell the fund that’s “not working”. Same can be said for First Eagle that had relatively tough 2012 and 2013.

• Volatility – standard deviation of returns is reduced to a reasonable 17.8% vs 21.1% for the index (while still providing much higher returns). Although SGOVX by itself has best returns and lowest volatility, it’s tough to stick with it when it lags in strong markets. And admittedly bastardized metric of standard deviation of relative performance looks good too.

• Purchase Restrictions – I should mention that both funds are closed to new investors and can only be purchased through advisors with existing positions (such as Gordian Advisors).

• Caveats – obviously this analysis is backward-looking and the combination of these funds might not work as well in the future. We have been using these funds in clients’ portfolios of many years but this is still backtesting and should be taken with a grain of salt. Moreover, these funds are not very tax-efficient so after-tax results would be less advantageous for non-retirement accounts.

In the next post, I will go past calendar years and look at rolling returns for the funds in graphical form.

 

Disclosure:

All content on this site is for information purposes only. Opinions expressed herein are solely those of Denis Smirnov and do not necessarily reflect the opinions of his employer.  You should not treat any opinion expressed by Mr. Smirnov as a specific recommendation to make a particular investment or follow a particular strategy, but only as an expression of his opinion. Material discussed is meant for general illustration and/or informational purposes only, and is not to be construed as investment advice.  Nothing on this web-site should be interpreted to state or imply that past results are an indication of future performance.  Although this information has been gathered from sources believed to be reliable, please note that individual situations may vary.  Therefore, any information should be relied upon only when coordinated with individual professional advice.

Share this:

  • Facebook
  • LinkedIn
  • Twitter
  • Pocket
  • Email

Sign up to the newsletter

Categories

  • Bear Markets
  • Bonds
  • Economy
  • Education
  • Financial Planning
  • Indexing
  • Investing
  • IPO
  • Retirement
  • Taxes
  • Uncategorized
  • Valuation

Archives

  • January 2023
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • May 2022
  • April 2022
  • February 2022
  • January 2022
  • October 2021
  • September 2021
  • July 2021
  • February 2021
  • January 2021
  • November 2020
  • October 2020
  • September 2020
  • July 2020
  • June 2020
  • May 2020
  • March 2020
  • February 2020
  • January 2020
  • November 2019
  • October 2019
  • September 2019
  • July 2019
  • May 2019
  • February 2019
  • January 2019
  • December 2018
  • October 2018
  • September 2018
  • July 2018
  • June 2018
  • May 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • October 2013
About
  • Background
  • Who We Are
  • The Gordian Knot
Services
  • Services
  • Planning Process
  • Investment Philosophy
Contact
  • Contact Details
  • Inquiry Form
  • Map
Media
  • Articles
  • Blog
  • Reviews
Dave
Denis
 
 
 
 

Gordian Advisors Financial Planner

Office: 2200 E. River Rd., Suite 109, Tucson, AZ 85718

Phone: 520-615-2779

Email: info@gordianadvisors.com

Download Form Form CRS Client Relationship Summary

Download Form ADV Disclosure Brochure

Gordian Advisors may only transact business or render personalized investment advice in those states where we are registered, or have filed notice, or are otherwise excluded or exempted from registration requirements. Material discussed is meant for general illustration and/or informational purposes only, and is not to be construed as investment advice. Nothing on this web-site should be interpreted to state or imply that past results are an indication of future performance. Although this information has been gathered from sources believed to be reliable, please note that individual situations may vary. Therefore, any information should be relied upon only when coordinated with individual professional advice.