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.

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.