Today's post is a continuation from a couple of weeks ago when we looked at model portfolios and talked about differentiation. I found model portfolios from WisdomTree via a Tweet and models from Fidelity via a Bloomberg article.
WisdomTree has a lot of models, this is just one that leans very growthy.
Fidelity's model included a couple of very new funds so I tweaked it a little keeping the same type of exposure like large cap but the changes allow for a longer backtest.
Then I built the following inline with what we usually work with here.
I'm also throwing in the year by year to get a better sense of how much differentiation there is or is not as you see it.
The Fidelity portfolio seems little more live by the sword die by the sword faring worse in 2022 and doing much better than the others in 2023. That is meaningful outperformance for such a short time but the tradeoff is much more volatility. The WisdomTree results are shockingly similar to VBAIX. It clearly outperformed in 2022 and then seemed to lag slightly every other year. That result is pretty good I'd say, it avoided the full brunt of the 2022 large decline which counts as a success.
Neither model uses any first responder defensives but WidsomTree does have a 5% allocation to its own managed futures fund as a second responder. And neither one tries to differentiate with fixed income or fixed income replacements which is a big priority for the fun we have here as well as in real life for my clients.
Portfolio construction is a lot easier when you can find yield that doesn't have equity-like volatility and it is also easier when you have a little bit allocated to something that will reliably go up when stocks go down. I think of those two items as true points of differentiation but there can be others. I am not too gung ho on too much equity differentiation. For me, the bulk of equity market exposure should be plain vanilla. As I mentioned the other day, if you want to tinker around the edges a little bit fine but whatever you think your equity allocation should be, put it in simple equities.
There's nothing truly awful about the models we looked at. As we discussed the other day, if you're going to use some sort of model off of a provider's shelf, what are you hoping to get? Whatever your answer to that question is, do you think the model gives a reasonable chance of achieving that outcome?
I'm not against model portfolios generally but there are plenty out there don't offer much.
The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.
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