According to Morningstar, my Intelligent Portfolio has 60% more small-cap and 20% more midcap than the market, as well as significantly less growth and more value than the market. Factor tilting is taking on more risk for greater expected return, though the boring cap-weighted funds have done better over the past several years.
Factor tilting may or may not work out better over the next three years. But Koenig pointed out that the Intelligent Portfolio is more representative of market-cap weightings of international versus U.S. equities than the simple Second-Grader Portfolio, which overweights the U.S.
Apples To Apples
Schwab says: “A third party report called The Robo Report tries to make a more apples to apples comparison with roughly 60/40 portfolios, and among other firms, it includes both Schwab Intelligent Portfolios and Vanguard Personal Advisor Services. The Schwab portfolio has higher returns, lower volatility, and better up/down capture ratios, as shown in the Q3 2017 report.”
|1-Yr Return||Std. Dev.||Sharpe Ratio||Up Capture||Down Capture|
Koenig told me the Intelligent Portfolio had outperformed the equivalent of Vanguard’s robo-type portfolio known as Vanguard’s Personal Advisory Services on a risk-adjusted basis.
No argument here, but then, I never set out to review a portfolio built by Vanguard Personal Advisory Services. I did, however, caution that any downside measurement would have to include periods longer than a stable up stock market.
The Schwab Intelligent Portfolio is a low-cost active investing strategy that I think is better than most active. I also applaud Schwab in general for bringing low-cost solutions to investors.
But I stand by my original piece that this Schwab Portfolio is at least as risky in a down market and over longer periods of time as the Second-Grader Portfolio. And it was Schwab that chose to outsmart the market and concentrate allocations to small-cap and value, a strategy that hasn’t worked out in the past, and may or may not in the future.
I think emerging market local currency, junk and gold don’t belong in the portfolio. And if one does believe cash belongs in a portfolio, there are other FDIC insurance accounts yielding 1.45% APY, or nearly 10 times what the Schwab account is paying.
Allan Roth is founder of Wealth Logic LLC, an hourly based financial planning firm. He is required by law to note that his columns are not meant as specific investment advice. Roth also writes for the Wall Street Journal, AARP and Financial Planning magazine. You can reach him at [email protected] or follow him on Twitter at Allan Roth (@Dull_Investing) · Twitter