Performance of Actively Managed Account...

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atwnsw
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Performance of Actively Managed Account...

Post by atwnsw » Sun Oct 29, 2017 3:59 pm

I use Vanguard for 50% of my portfolio in VTSAX (Total Stock) and VTIAX (International Stock).
For the other 50% of my portfolio, I use an investment advisor who actively manages a 40% equity/60% fixed income portfolio.
I pay him roughly 1% annually.

Total Investments are $5m.
Here is the latest performance:

Image

Observations:
He has consistently underperformed equity (which is why half the equity investments are with Vanguard).
He has consistently outperformed the fixed income (this particular firm gets access to new issue bonds).
If I dump him, there is no good fixed income alternative that comes close to his consistent returns on bonds.
Because he gets paid .25% on fixed income and 1.25% on equity, I can't simply use him for fixed income only.

Question:
If you were in my shoes, what would you do?
Last edited by atwnsw on Sun Oct 29, 2017 5:08 pm, edited 2 times in total.

mhalley
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Re: Performance of Actively Managed Account...

Post by mhalley » Sun Oct 29, 2017 4:05 pm

Leave. The reason you are getting such good returns on bonds has to be that he is taking large risks on the bond side. So you are actually in a much riskier portfolio than you think you are.

lgs88
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Re: Performance of Actively Managed Account...

Post by lgs88 » Sun Oct 29, 2017 4:11 pm

By my reading, it looks as if he has outperformed (or matched, net of fees) the market return in the equities portion of the portfolio for every time frame except YTD. I may be misreading it, though.

On the fixed income side, this is an interesting issue. He is benchmarking his performance to the Bloomberg Barclay's US Aggregate Bond Index, which is about 70% government or government-backed bonds. This may or may not be an appropriate benchmark, since not all bonds are created equal, and not all bonds will perform the role of ballast that you might want them to during an equities crash.

What sort of bonds is he buying for you? Corporates? High-yields? Long-term bonds? You don't get those outsize returns without outsize risk. In all likelihood, his selection of benchmark is not appropriate.
merely an interested amateur

Grt2bOutdoors
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Re: Performance of Actively Managed Account...

Post by Grt2bOutdoors » Sun Oct 29, 2017 4:12 pm

What you don't show in your performance figures is what type of fixed income your investment manager is investing in? Is it apples to apples or is investment manager purchasing new issue corporates with longer maturities or high yield fixed income and the proportion of type/maturity/credit rating compared to that of the AGG? Sounds like investment manager is making more due to taking on higher risk, risk that doesn't show up in AGG.

Now, hypothetically speaking, you could decide to give investment manager instructions to weigh portfolio 10/90, such that only 10% of portfolio is in the 1.25% bucket and the remaining amount is in fixed income. But as poster above indicates, you are paying a high price for under performance.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

Grt2bOutdoors
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Re: Performance of Actively Managed Account...

Post by Grt2bOutdoors » Sun Oct 29, 2017 4:17 pm

lgs88 wrote:
Sun Oct 29, 2017 4:11 pm

What sort of bonds is he buying for you? Corporates? High-yields? Long-term bonds? You don't get those outsize returns without outsize risk. In all likelihood, his selection of benchmark is not appropriate.
+1 - Exactly! I agree with you, typical of investment managers to skew results in a favorable light by misclassification of the benchmark. Sometimes it's an oversight, and sometimes not. Sometimes because the IM is actively trading for best opportunities across entire fixed income spectrum, they don't have a customized benchmark or they don't want to disclose level of risk they incur when making these trades.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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tennisplyr
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Re: Performance of Actively Managed Account...

Post by tennisplyr » Sun Oct 29, 2017 4:23 pm

So you're obviously out tens of thousands of dollars, I know what I would do.
Those who move forward with a happy spirit will find that things always work out.

atwnsw
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Re: Performance of Actively Managed Account...

Post by atwnsw » Sun Oct 29, 2017 5:13 pm

Two points of clarification:

I posted the incorrect portfolio return originally and have since changed it to reflect the correct performance review.

I did look up the bond portfolio investments and here is the mix:
5% Cash
28% Corp Debt
22% Corp High Yield Debt
45% Corp Floating Rate Debt

When I ask the question of what would you do, I should more specifically ask: How would you invest the fixed income portion if you left this manager?
The equity portion is a no-brainer but the fixed income is trickier (IMO) which is why I am struggling....

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Ged
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Re: Performance of Actively Managed Account...

Post by Ged » Sun Oct 29, 2017 5:21 pm

I would buy Vanguard TBM.

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Sandtrap
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Re: Performance of Actively Managed Account...

Post by Sandtrap » Sun Oct 29, 2017 5:27 pm

What I would do:
At this point you know enough to no longer need his services. You can do better and with less risk on your own. And, save the AUM fee.
Vanguard Total Bond Market. Index. Diversify. Low costs. Own the farm.

Grt2bOutdoors
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Re: Performance of Actively Managed Account...

Post by Grt2bOutdoors » Sun Oct 29, 2017 6:21 pm

atwnsw wrote:
Sun Oct 29, 2017 5:13 pm
Two points of clarification:

I posted the incorrect portfolio return originally and have since changed it to reflect the correct performance review.

I did look up the bond portfolio investments and here is the mix:
5% Cash
28% Corp Debt
22% Corp High Yield Debt
45% Corp Floating Rate Debt

When I ask the question of what would you do, I should more specifically ask: How would you invest the fixed income portion if you left this manager?
The equity portion is a no-brainer but the fixed income is trickier (IMO) which is why I am struggling....
Mimic it, but for less cost:
Vanguard Intermediate Term Investment Grade (VFIDX) - 28%
Vanguard High Yield Corp Adm (VWEAX) - 22%
Vanguard Short Term Investment Grade (VFSUX) - 45%
Cash - 5%

You have to be comfortable with the risk though, in 2008, the above portfolio declined 8.37% while the Total Bond Market Index was up 4.97%. In 2009, the above portfolio rebounded smartly to 20.02% while the Total Bond Market Index was up 5.74%. During the last ten years, Total Bond Market has had only 1 down year (2013 -2.04%). If you want a calm, sedate ride then Total Bond Market Index is the one fund you should invest all of your money in on the fixed income side. If you like volatility and think it's worth earning a grand total of 0.48% per year CAGR in exchange for a 25% higher standard deviation of returns, then go with the mix up above.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

GmanJeff
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Re: Performance of Actively Managed Account...

Post by GmanJeff » Sun Oct 29, 2017 7:09 pm

The bond component of your portfolio should reflect your tax sensitivities and an asset allocation which achieves your desired risk/reward ratio. Taxable bonds versus tax-free, depending on your tax situation. Duration depending upon your risk tolerance. International versus domestic, depending on your risk tolerance and views about the benefits of such diversification. Higher quality versus lower quality depending on your risk tolerance.

VG offers low-cost funds which represent all different bond categories; but it's up to you to select the ones which best meet your needs for tax avoidance, diversification, and risk, in the optimum proportions. If you are a Voyager client or better at Vanguard ($500K+ in assets with VG), you can get free advice from a Certified Financial Planner to perhaps get you pointed in the right direction.

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oldcomputerguy
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Re: Performance of Actively Managed Account...

Post by oldcomputerguy » Sun Oct 29, 2017 7:42 pm

atwnsw wrote:
Sun Oct 29, 2017 5:13 pm
Two points of clarification:

I posted the incorrect portfolio return originally and have since changed it to reflect the correct performance review.

I did look up the bond portfolio investments and here is the mix:
5% Cash
28% Corp Debt
22% Corp High Yield Debt
45% Corp Floating Rate Debt

When I ask the question of what would you do, I should more specifically ask: How would you invest the fixed income portion if you left this manager?
The equity portion is a no-brainer but the fixed income is trickier (IMO) which is why I am struggling....
This would seem enough to prove that he is using an inappropriate benchmark. The Baclay’s Aggregate index is mostly government bonds, and your portfolio is all corporates. In addition, I note that over one-fifth of your bond holdings are junk bonds, which are more closely correlated with equities and so do not serve well as diversifiers. I would expect this bond portfolio to tank along with stocks during the next market downturn.

I would swap all of these holdings for total bond market and stop paying the manager.
Anybody know why there's a 20-pound frozen turkey up in the light grid?

atwnsw
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Re: Performance of Actively Managed Account...

Post by atwnsw » Sun Oct 29, 2017 8:18 pm

Not trying to hijack my own thread, but when I looked at Vanguard Bond Funds several years ago, I concluded (correctly or incorrectly) that Bond Index Funds would be disproportionately impacted in a rising interest rate environment. The logic being that as rates went up and prices went down, the Bond Funds would suffer liquidity issues and accelerate the sale of bonds to pay off investors pulling out of the funds. Therefore, the remaining shareholders' loss would be amplified. The conclusion: The only way to avoid this risk was to own individual bonds in one's portfolio.

Am I smoking crack or is there any truth to my understanding? Any insight would help me get more comfortable with the approach of moving the bonds to Vanguard....

When it comes to investing bonds, I feel like I have just enough knowledge to be dangerous..... :)

Thanks

Anthony

Grt2bOutdoors
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Re: Performance of Actively Managed Account...

Post by Grt2bOutdoors » Sun Oct 29, 2017 8:33 pm

atwnsw wrote:
Sun Oct 29, 2017 8:18 pm
Not trying to hijack my own thread, but when I looked at Vanguard Bond Funds several years ago, I concluded (correctly or incorrectly) that Bond Index Funds would be disproportionately impacted in a rising interest rate environment. The logic being that as rates went up and prices went down, the Bond Funds would suffer liquidity issues and accelerate the sale of bonds to pay off investors pulling out of the funds. Therefore, the remaining shareholders' loss would be amplified. The conclusion: The only way to avoid this risk was to own individual bonds in one's portfolio.

Am I smoking crack or is there any truth to my understanding? Any insight would help me get more comfortable with the approach of moving the bonds to Vanguard....

When it comes to investing bonds, I feel like I have just enough knowledge to be dangerous..... :)

Thanks

Anthony
Faulty analysis. Did you read my post up above? In 2008, the height of a liquidity run, the Total Bond Market Index fund posted a total return of over 4%, the same can not be said of junk bond funds. Junk bonds exhibit equity like characteristics - you get the risk but without the return. Why don't you elaborate on just how Vanguard Bond funds would be disproportionately impacted as compared to other bond funds and the entire fixed income universe? How did you reach such a conclusion? Do you believe that there would only be a one way exodus of fund shareholders and fail to acknowledge that there were and always will be new purchasers entering into the fund, that bonds pay interest on a daily basis and that there were constantly maturing bonds in the portfolio that could be used to pay off redeeming shareholders and make new purchases at then current market interest rates?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

pkcrafter
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Re: Performance of Actively Managed Account...

Post by pkcrafter » Sun Oct 29, 2017 10:50 pm

atwnsw, this is a big red flag:

equity returns, gross of fees
bond returns, gross of fees

The returns you posted are not correct because of that.

You said the advisor is buying individual bonds, how many do you own? individual bonds will have a brokerage fee to purchase, sometimes pretty high.

Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.

KSActuary
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Re: Performance of Actively Managed Account...

Post by KSActuary » Sun Oct 29, 2017 11:39 pm

I would take a long look at the PIMCO Income fund or other PIMCO fixed income products.

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BL
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Re: Performance of Actively Managed Account...

Post by BL » Mon Oct 30, 2017 9:58 am

Perhaps also consider Vanguard PAS (0.3%/year AUM) for decent allocation and low cost funds. Could be discontinued after a year. You may have enough to get free consult from V as well.

Good advice above. The more risky (junk) V funds are probably much safer than your advisor's.

Are you including all your costs: spread in individual bond purchases, his fees, many other possibilities?

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