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"Your portfolio is a bowl of soup of random investments, seemingly cobbled together over time."Meb Faber, Cambria Investments

We review outside investment statements quite often.  Occasionally, we will come across a portfolio so haphazardly put together it personally offends us (we feel like superheroes rescuing unsuspecting investors from evil brokers).  This portfolio wasn’t invested in the tried and true broker schemes of annuities, non-public REITs, limited partnerships, A & C share mutual funds.  This portfolio was different.  It held 32 mutual funds & ETFs totaling <$80,000 of assets. 

Diversification is widely accepted as sound investment principle.  Owning multiple asset classes to smooth portfolio returns over market cycles is a solid strategy.  However, too many holdings can sometimes do more harm than good.  Over-diversification is owning a random assortment of ticker symbols with no rhyme or reason.  When we own everything, we really own nothing.

If we are giving the benefit of the doubt, we might assume the portfolio was owned by an investor that collected various mutual funds & ETFs over time.  Perhaps they had several different advisors through the years?  Maybe large embedded gains prevented reallocating?  Worse yet, could the portfolio have been put together on purpose?

The Holdings: Clear as Mud

8 Alternative mutual funds– long/short, managed futures, arbitrage, etc.  See the woeful merits and high fees of such strategies here

9 Bond funds–  Includes tax-exempt, corporates, treasuries, international, mortgage backed, and high yield.

5 International + Emerging Market equity funds– how would you begin to understand country exposures investing in five different dark pools?

9 US Equity funds– if you aggregated the holdings of all the funds you would get the S&P 500 index, but with the added pleasure of paying 1% with a side of tax inefficiency.

1 Commodity mutual fund– commodity futures are meant to be traded, not owned.  See the dismal track recordof commodity funds over the past 10 years.

If we could only ask the advisor a few questions…

What drives return & risk in the portfolio? 

What do we actually own?

Can we really track 20+ outside managers?  Are you in-tune with all those different fund strategies?

How do we account for redundant holdings i.e. manager 25, 26, and 27 all have Apple as their favorite idea?

Definition of success and failure?  How can we possibly benchmark our mutual fund/ETF salad?

This is the anti-Evidence Based portfolio (buying everything that has been proven NOT to work and sprinkling in some ETFs for optics). 

We prefer simple to complex, keeping costs down, tax efficiency, knowing precisely what we own, and having a clearly defined benchmark to measure success & failure.

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