By Dan Hallett, CFA, CFP
Fifteen years ago, writer and broadcaster Alison Griffiths asked University of Toronto professor Eric Kirzner to create what was named the ‘Easy Chair Portfolio’. The goal was to create a simple portfolio structure that provided passive exposure to ‘market returns’ and could be left without tinkering for decades.
In a recent article, Griffiths provided an update on this 15-year-old portfolio. Not surprisingly, it has done well. But it got me thinking about a similar portfolio I created for Griffiths almost a decade ago.
In the spring of 2003, Griffiths was writing a book with husband David Cruise called The Portfolio Doctor (named after the series of newspaper columns they wrote for many years) – and asked if I would create an actively-managed mutual fund version. I was happy to help and I suspect that the results surprised the authors.
The Easy Chair Mutual Fund Portfolio
My goal was to mirror Kirzner’s original Easy Chair Portfolio, with some subtle but important differences.
For Canadian equities, I allocated 35% to Mawer Canadian Equity – a fund I’ve used and recommended since 2001. This lines up well with the original version’s iShares S&P/TSX 60 Index exchange traded fund.
For non-Canadian equities, Kirzner selected the iShares S&P 500 Currency Neutral Index ETF for a 15% allocation. Originally, this was not a currency hedged fund but adopted this policy several years ago. I didn’t like being restricted to the U.S. so I ‘spent’ my 15% on Trimark Fund - SC. With fees having bounced between 1.6% and 1.7% annually over the past nine years, it stood out as a DIY-friendly global equity fund. And it had long been my favourite global equity fund until last year. (I would replace this today with Mawer Global Equity or, for some manager diversity, Beutel Goodman World Focus.)
Rather than stick with a short-term bond to line up with Kirzner’s iShares DEX Short-Term Bond Index ETF, I went with PH&N Bond fund for 30% of this hypothetical portfolio. I reasoned that if you’re only going to have one fund for bonds it should offer broader exposure rather simply tilting to any segment of the bond market.
Finally, the original Easy Chair allocated 20% to cash so I simply chose the cheap PH&N Canadian Money Market fund because anybody implementing this portfolio would most easily achieve PH&N’s $25,000 minimum by keeping both bond and cash funds in the same family.
Performance Comparison
It’s worth noting that when I constructed this portfolio more than nine years ago, it sported historical performance that lagged the original Easy Chair Portfolio. So I cannot be accused of data mining. Much like the work my partners and I do today, I did my best back then to take a forward-looking approach to selecting the portfolio components. I’m pleased to say that the results have been quite good – as illustrated in the table below (which covers the period starting on May 1, 2003 and ending on August 31, 2012).
Had readers invested in my Easy Chair Mutual Fund Portfolio, you’d be sitting on a good bit of outperformance net of all costs – to the tune of almost a full percentage point annually above the original Easy Chair - and with less downside risk and 20% less volatility. No matter what’s assumed for rebalancing (some or none) and distributions (reinvested or taken in cash) the outperformance is significant and has persisted over this nearly ten-year period.
To be fair, the original Easy Chair Portfolio is not the best benchmark for my actively managed version. But even using a more suitable custom benchmark shows raw outperformance with less risk and volatility.
Neither I nor HighView is in the business of advising do-it-yourself investors. But I couldn’t help but highlight this given all of the media’s thrashing of mutual funds, active management and efforts to identify successful active managers.
More importantly, the success of both portfolios highlights the importance of keeping simpler portfolio structures. Index investors are best to focus their efforts on obtaining the broadest exposure possible at the lowest available cost. (See my article ETF Rule: keep it simple.)
But even for investors seeking active management, broader more flexible mandates are best in the hands of skilled money managers. So a few broad-based funds with solid management and reasonable fees is a combination that is tough to beat with more complex structures. There are no certainties in the world of investing. But success usually comes to those who take every opportunity to tilt the odds in their favour.
Would you have written this article if your portfolio had underperformed?
No. But it was the Toronto Star article on the original Easy Chair portfolio that triggered my interest in the first place. And I contacted Alison and asked if she wanted to do an update on my mutual fund version – mentioning that I thought the results were pretty good. If my suggestions had done poorly, I’m assuming it would have been covered by Alison or somebody else who would have held it out as further evidence that active management doesn’t work. So I took it upon myself to update performance, which I’d tracked occasionally since 2004.
But it’s not like I recommended a dozen different portfolios and decide to write about the best one. I was asked to recommend a portfolio that would forever live in print and that I could never take back.
So I used my favourite funds and holdings that I always used in all portfolio recommendations to DIY investors and simply tweaked the percentages to match the easy chair. Anybody who was a client then and now could, for example, confirm that Mawer is a firm I have recommended for Canadian stocks throughout the period.
But the broader point of that article was really how successful investing need not be complex and need not require much tinkering at all. That was the larger point – which I’ve written about many times over the past decade.
I should add that I’m not pretending to have a perfect record. Far from it. I have made my share of mistakes when it comes to manager recommendations. The larger point is that when you…
- focus on matching investment assets to future spending liabilities,
- keep an eye on costs,
- design sensible mandates,
- select managers that fit well with preferred mandates and exhibit the characteristics that are linked to good ‘future’ performance, and
- being sensitive to a client’s tax status…
…you increase an investor client’s chances of success. Relying solely on picking the best managers will make success much tougher to achieve. But doing everything possible to tilt the odds in the client’s favour will significantly raise the chance of achieving stated goals or otherwise having a successful investment portfolio.