Yeah, Yeah, Yeah. What About Investment Performance?

In this quarter’s newsletter I am skipping the usual “educational” character of our investment articles, and will instead give you some news about investment performance so far this year.

The Wall Street Journal (10/1/99) reports that the average stock fund lost 6.16% during the third quarter, and has a 4.41% total return so far this year (9/30/99). The same article also points out that the average stock has fallen 20% from its high. The New York Times (10/3/99) reports that the median year-to-date return for domestic general stock funds was 3.3%, and the median return for bond funds was -1.3%. International stock funds have returned 12.7% so far this year. Over these past four years many money managers have been under pressure from their clients to abandon their disciplines in favor of trying to keep pace with the S&P 500 index – an index driven by 25 large growth stocks. As most of you know, while our performance has been excellent during this same four-year period, our strategy of creating and managing diversified portfolios has put us at a disadvantage relative to the S&P 500 index.

However, this year has been decidedly different. While the S&P and the average mutual fund’s performance have lagged, our performance has soared. The average YTD return of our clients (those who have been with us for more than 1 year) was 9.61% – more than twice as high as the average equity mutual fund. If we weight our returns by the size of our clients’ portfolios (size weighted), returns have averaged 8.32% (smaller accounts did a little better than larger accounts). What makes these figures amazingly good is that many of our larger portfolios are conservatively structured to provide income for our clients, and we would expect performance for these clients to be lower than the performance of equity funds, not higher. In addition, our performance numbers and averages include some “non-performing” assets (old limited partnerships, life insurance policies, etc.) which our clients hold in their portfolios, which places a drag on our performance numbers.

Obviously, not all of our clients achieved these same results. This was a period where our allocation to aggressive stocks and international funds really paid off. However, since our more conservatively managed clients do not own as many of these types of assets, their performance might have been below the average.

Using the data from the WSJ and The New York Times, we can estimate the return of the average “balanced” (50% equity, 50% fixed income) mutual fund holder at 1.55% (50% x 4.4% + 50% x -1.3% = 1.55%). This is very close to Value Line‘s report on the average YTD return for balanced funds, which is 1.18%.

We are pleased to note that 39% of our clients who have been with us for more than one year had double-digit returns exceeding 10%, and 91% had returns exceeding the rate of the average balanced fund (>1.55%). Of the nine clients which did not achieve the “average balanced fund return,” six were smaller accounts holding mutual funds, and unique situations affected the remaining three clients.

Obviously, we are very pleased with these results and we hope you are too. Of course, prior investment results are no guarantee of future results. We continue to believe that the key to successful investing is to follow a discipline based on substance rather than the ever-present noise in the marketplace.