I want to report on how the models I’ve created for managing client assets have performed now that they’ve established a long enough live history to be relevant. I’m the first to admit that 4 years is still very short in the investment world, and no one knows what the future holds, but I’m happy to say that since Frontier Advisors has been in business, our strategies have done what I hoped and expected they would, and also for business that need network connections Cloud service providers like ConsoleConnect and others have large networks for businesses.
So what should one take from this performance history? Let me start with what NOT to take from it. First, don’t extrapolate past gains into the future. The last four years have been recovery years for the markets and I doubt we’ll see annualized returns like this going forward. Second, I also don’t know if it’s smart to expect this magnitude of relative outperformance from the equity side of things. While I do expect Frontier’s equity strategy to do better than its broad, global, cap-weighted benchmark over time for several reasons (happy to discuss with anyone interested), we may be looking at a fortuitous time period for performance measurement. It’s important for one to have appropriate expectations.
What I DO hope you will take from this, however, is that beating a global equity benchmark doesn’t require most of what the investment industry tells people it does. It doesn’t require a tactical strategy where a portfolio manager or investment committee decides when to get in and out of certain markets throughout the year only (I have avoided making a single market timing call over the last four years) – the overwhelming majority of evidence shows these strategies don’t work. Beating a benchmark also doesn’t require a time-consuming yet futile effort to find superstar fund managers to control pieces of the strategy, an effort that only serves to drive up costs, turnover, and taxes (I used only low-cost index strategies the entire time, with an average expense ratio well below 0.20% and an irrelevant amount of turnover and tax exposure). By the way, outsourcing parts of the portfolio to others also dramatically reduces a portfolio’s transparency, making it impossible to fully control the sources of risk and return. Finally, beating a benchmark doesn’t require one to buy into the latest investment fads such as dividend- or income-yielding strategies, inflation-protection, hedge funds, etc. Again, all those strategies do is drive up costs, reduce transparency, decrease liquidity, and add stress to an endeavor that is already stressful enough.
What benchmark-beating portfolio management does require is 1) a firm knowledge of how asset classes perform in general and relative to others over time, 2) a focus on keeping all investment costs as low as possible, and 3) the discipline, patience, and perspective to avoid overreacting to the overwhelming amount of noise emanating from the investment marketplace. It’s easier said than done since the hardest thing of all is to avoid our natural inclination to “do something” all of the time, but so far so good…