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.
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.