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Benchmark for stocks portfolios: Vanguard Total World Stock ETF (Ticker: VT): +24.49%
About the Benchmark: VT is an ideal benchmark for the world stock market. It is a global stock index fund that covers approximately 98% of the world’s investable market capitalization. About 50% of the fund’s portfolio is invested in U.S. stocks, 40% in international developed stocks, and the remaining 10% in emerging-market stocks.
Benchmark for fixed income portfolios: iShares Core US Aggregate Bond ETF (Ticker: AGG): +3.53%
About the Benchmark: AGG provides a measure of the performance of the U.S. dollar denominated investment grade bond market, which includes investment grade (must be Baa3/BBB- or higher using the middle rating of Moody’s Investor Service, Inc., Standard & Poor’s, and Fitch Inc.) government bonds, investment grade corporate bonds, mortgage pass through securities, commercial mortgage backed securities and asset backed securities that are publicly for sale in the United States.
W. Swartz Total Return (WSTR): +23.25% (after fees)
About this Portfolio: This portfolio is 100% stocks and used in accounts I manage where the client has about $250,000 allocated to stocks. It is the flagship portfolio of W. Swartz & Co.
Why the Underperformance? The primary cause of underperformance vs. benchmark was due to an underweight towards Emerging Markets vs. the benchmark. Emerging Markets were the top performing class when comparing US vs. International Developed vs. International Emerging.
BRAVO: +23.13% (after fees)
About this Portfolio: This portfolio is 100% stocks and used in accounts I manage where the client has below $100,000 allocated to stocks. It will mirror the WSTR portfolio in theme, but with fewer holdings.
Why the underperformance? Two primary causes.
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1. These client portfolios had underperformance because “timing” of contributions and trades. Since the benchmark generally speaking took a very steady/smooth path higher during the course of the year, the BRAVO portfolios/accounts were negatively impacted by having ongoing contributions as those contributions were unable to get the full year’s positive returns.
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Example: Account 100% allocated to the BRAVO portfolio starts year with $50k balance, but has another $15K contributed during the course of the year. That additional $15K did not get the benefit of previous returns that occurred before the contribution/investment date.
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A underweight to emerging markets vs. the benchmark contributed to underperformance. In terms of US, International Developed, and Emerging Markets, EM was the top performing category and the portfolio was underweight there.
CORE Fixed Income: +3.68% (after fees)
About this Portfolio: This portfolio is 100% fixed income correlated securities. Meaning that it may not be invested in individual debt securities, but rather pools of debt securities in the form of ETFs &mutual funds. This portfolio uses the Vanguard Total Bond Market ETF as a benchmark.
Why the Outperformance? Overweights to high-yield, and corporate bonds vs the benchmark led to outperformance.
Individual Stocks: +27.93% (After Fees)
About this: This is the performance of the individual stock holdings within WSTR. Within the WSTR portfolio, the individual stock positions weighted equally (which they are within WSTR) achieved the above after fees return.
Why the Outperformance? One of the ways an investor can achieve alpha, that is outperformance compared to a benchmark if through stock selection. Meaning picking stocks that do better than the benchmark/overall market. This was the case for the individual holdings within the WSTR portfolio in 2017.
Conclusion: While I would have preferred to see all portfolios outperform in 2017, every portfolio performed in line with benchmark. First and foremost it is my job to ensure that clients get the type of returns they are supposed to get over long-term periods. All portfolios were successful in achieving that purpose. The average investor has drastic underperformance over short and long-term periods.
– Wyatt Swartz
– 1/18/2018
