Focusing portfolios on the top quintile

The median mutual fund total return over the last 20 years is about two-thirds that of the Standard & Poor’s 500 stock index — or about 8% annually.
After fund costs/expenses (3%), taxes (3%) and inflation (3%), there is a 1% annual loss for 100 million-plus investors.
A few influential people such as John C. Bogle, founder and former chairman of The Vanguard Group Inc. in Malvern, Pa., have been vocal about this but emphasize costs and expenses as the culprits. Even if all costs and expenses were zero, the annual real net return would be only 2%.
The use of unmanaged index funds is a step in the right direction — after minor costs and expenses, inflation, and taxes, there would be an annual gain of 5% to 6%. It would, therefore, take 12 to 14 years for a principal sum to double.
Is there an answer to the mutual fund selection paradox?
Yes.
Past-performance data reveal a wide disparity between portfolio managers — not all of whom are skilled or lucky enough to beat the market, as measured by the S&P 500. The reality is that about 80% of managed funds do not beat the market on a consistent basis, but 20% do.
To complicate matters, the components of that
benchmark-beating 20% do not remain constant but are subject to change over time.
Why has choosing funds become so difficult?
Back in the early 1950s when there were 100 funds, it was a relatively simple matter to choose funds. Now with 8,000 to 10,000 funds, selection has become a nightmare with too many funds from the bottom 80% being selected because of their sheer numerical superiority (three to six times as many) over top-20% funds.
The question is: How can portfolios be focused more on the top 20%?
Using past performance, a reliable, mathematical model has been developed to objectively identify, separate and discard the bottom-80% funds from a population, leaving only top-20% funds to choose from. Funds chosen from this 20% group, therefore, exceed the performance of the S&P 500 over time.
Model returns of 100% to 200% of the S&P 500 are routinely expected and realized — after deducting costs, expenses, taxes and inflation — with real annual gains of 9% doubling principal sums every eight years.
Financial scholars and pundits in the last 50 years have steadfastly held to the view that past performance is not a reliable predictor of future results. As long as this specious position persists, the financial suffering of 100 million-plus fund investors will persist.
Isn’t it time for brokers and advisers to access top-20% funds and help investors achieve a higher level of expectations and returns?
Arthur Regen
Managing director
Regen Associates
East Brunswick, N.J.

Providing solutions for unseen problems
I want to thank InvestmentNews for regularly featuring the work of Milton Ezrati.
In particular, “The investment buzz has come almost full circle” [April 2] was spot on. His past article on the weak total-return prospects for high-quality bond investments was also a tremendously thoughtful view.
As advisers, we are all tempted to get caught up in the day-to-day hustle and hassle of running a business and serving clients. But when you think about it, there are some market environments that take care of the clients for us. The four-year run-up since the stock bear market bottomed out in 2003 is one such period — you don’t have to be a genius to deliver solid returns in those environments.
But, as the clients might say, “who is there to catch me when I fall?” More specifically, when returns and cash flow to fund their lifestyles are tougher to generate due to broad market conditions, which advisers will come to the forefront with actionable ideas and investment approaches that stand the best chance of delivering a “safety net” and continued opportunity for clients?
I published a book late last year called “Wall Street’s Bull and How to Bear It” [written with Ian Lohr, Isle Press], and many of the themes it covers are in sync with Mr. Ezrati’s thinking. Our firm has spent years developing for ourselves and for advisers a set of non-traditional investment approaches, but using traditional security types (mutual funds and ETFs primarily) to target all-weather portfolios of varying risk levels.
Reading Mr. Ezrati’s April 2 article was a welcome confirmation of our years of research to provide solutions to investors for problems they do not realize they have today (but may have one day soon). For that, and for promoting a cooperative culture within our industry, we thank you.
Robert A. Isbitts
President and
chief investment officer
Emerald Asset Advisors LLC
Weston, Fla.

Related Topics: Letters To The Editor