Investment Performance Analysis

For 2013, the return of a passively managed index of 68.1% S & P 500, 28.6% taxable intermediate-term bonds and 3.2% short-term money market funds was 20.2%. The ABC Foundation actively managed portfolio return was 16.25%. Difference from the passive benchmark expressed in $ terms was ($1,051,521).

 

For 2014, the return of the passively managed benchmark (using the same methodology as above) was 11.0%. The ABC Foundation actively managed portfolio returned 6.3%. Difference from the passive benchmark expressed in $ terms was ($1,379,300). Thus, a passively managed portfolio with lower fees would have ended up $2,430,821 larger than the ABC portfolio over the two year period.

 

A primary contributor to the ABC Foundation underperformance were the underweight positions in high return S & P 500 sectors such as information technology which returned 20.1% in calendar 2014 but was weighted at 9.53% in the ABC portfolio versus an S & P sector weighting of 19.64%. Another underweighting occurred in healthcare which returned 25.3% in 2014, but comprised only 4.56% of total weighting in the ABC portfolio vs. an S & P sector weighting of 14.27%. Similarly, ABC was significantly under-weighted in consumer discretionary which returned 9.7% in 2014. ABC portfolio sector weightings were above average in financials which returned 15.2% in 2014 and consumer staples which returned 16.0% and slightly above average in industrials which returned 9.8% in calendar. Also helping performance was a slight underweight in energy which returned (7.8%) in 2014. In summary, the ABC portfolio would have performed better if the overweight positions in financials and consumer staples had instead, been equal-weight invested in healthcare and information technology sectors.

 

Another interesting feature was the large number of equity positions (19) comprising 1% or less of the equity portion of the portfolio. Typically, a well-diversified portfolio contains 25-35 equity positions each comprising about 2-5% of the total equity market value. ABC portfolio had 44 equity positions at the end of 2014. The portfolio was also unbalanced at the other end with 6 position sizes above 5% of equity market value with 3M being the largest at 9.65% of total equity market value. Total return of the equity portion in calendar 2014 was 6.12% vs. an S & P 500 return of 13.69%. If the bottom 19 positions sizes were eliminated, the rate of return rises to 10.32% - better, but still substantially below an unmanaged index such as the S & P 500. As a final observation on the equity portion, half of the 44 stocks went up and half went down or broke even for a win percentage of 50% for 2014.

 

Another feature were the expense ratios of the mutual funds in the portfolio (see chart attached). Out of 10 mutual funds, six had expense ratios above 1%. The highest expense ratio was 5.5% for the Oppenheimer MLP income fund followed by 2% for the AQR alternative fund. Five funds had negative income to expense ratios, while five funds had positive income to expense ratios.

 

Finally, an examination of the buys and sells for 2014 indicates buying and selling distributed over the  12 month period with a heavy selling period taking place in May as the market was preparing to move higher from its February lows.