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Trying hard to make sense of the options

makingsenseThis post is something of a rarity for me - I want to focus on something of a more technical nature, and I'm going to attach some supporting documents which may (if I am lucky) help.  The thing which interests me here is the way in which our chosen investment models tend to work, when compared with alternatives which (initially at least) look feasible, or relevant.

The backstory here is that, in March 2011, I was in the process of investing a dollop of my Transact pension fund when I had the choice of either using one of our internal ValidPath model portfolios (60/40 Equity/Bond) or 'something else'.  In this case, the 'something else' was the Way Hasley Global Momentum Fund which launched the previous month.  What was focusing my mind was the representative from Hasley, and old friend who was doing his best to persuade me that this fund was actually a viable alternative to the more traditional asset-allocation strategies (to which, I will admit, I was fairly firmly wedded in principle).

Now, I'm not a great fan of the idea of experimenting on clients when it comes to new stuff.  I generally would not want to go down that route until I had experimented on myself first, as it were.  So here was the perfect opportunity!  On the 31st March 2011, I invested two sums via my own pension, one into the good old ValidPath 60/40 model, and the other into the brand, spanking new Momentum Fund where, as far as I could see, the predominant risk was that all the techie knowhow simply wouldn't work in practice.  I must confess to not being particularly convinced by the new innovation, although it was difficult to gainsay the substantial academic input to the new fund's strategy.  I hope that putting my money where my mouth was, was a sign of an open-mind - even though, intellectually, it was difficult to justify the approach I was about to take.  In recent years, there has been an endless succession of new fund launches, and new propositions, which simply don't 'fit' any kind of coherent philosophy that one might come up with.  My response, invariably, is to ignore them and focus on what I know works.

Two years down the line, how have the two models compared?  OK, I accept that in equity markets, two years is almost too short a time on which to make any kind of valid comparison - but I would expect the shorter term to almost favour the Way Global Momentum fund against the more traditional model which is likely to be more directly affected by systemic fluctuation.  Over exactly the same time period, to today's date, and net of all charges, here are the returns achieved:

Investment Model Return from 31/03/2011
Way Global Momentum +6.13%
ValidPath 60/40 +10.08%

If you wish to see the bigger picture for the ValidPath 60/40 model, then here is what it has looked like:


You can download further analysis of the two alternatives from the following links:
Now, I can think of some immediate objections to making a direct comparison.  The Way fund is a pure equity fund...except when it's not.  And the ValidPath model assumes a buy and hold, relatively bog-standard asset-allocation model which is hardly likely to pander to the whims of those clients who enjoy the investment equivalent of bungee-jumping.  But the two models do, in a way, encapsulate two quite different approaches to investment - what the Way fund purports to offer is a method of benefiting from equities whilst at the same time minimising the downside, and therefore it does not seem unreasonable to make the comparison.  After all, that's what an efficient strategic allocation model is supposed to be doing.

One key point of comparison is evident when you look at the Factsheets.  Shortly after launch, the Way fund dived for cash and then sat on its hands until late 2012 when, true to the theory, it leapt back into the market.  By comparison the good old 60/40 model has just plodded along, doing what buy-and-hold models do best.  My conclusion is that I will keep the Way fund for a further twelve months, and see if the passage of time does anything to amend my impressions - I am mindful that it represents a significantly more expensive way of investing, and certainly for my clients, my preference would be towards solutions which more explicitly demonstrate their value.


Have you taken a look at Dimensional Fund Advisers' conceptually rigorous and well-implemented 'Multi-Factor Funds'?  Why not start investigating this very efficient approach to investing by downloading their presentation?

Kevin Moss, 25/04/2013

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