Truly Diversified and Strategic Value Growth Model Portfolios
Monthly Performance and Risk Summary
Eleven Two Fund Management is a Registered Investment Advisor (RIA) specializing in reducing the risk, increasing the steadiness of returns, and preserving the value of its client’s portfolios primarily by using true diversification. Below is the illustration of our signature diversification and value investing strategies (TDP & SVG) utilized by Eleven Two Fund Management.
Here are a few of the verses already mentioned on the ETFM website that I
believe are relevant to how we invest today. Please review them to decide
your own take/interpretation.
Ecclesiastes 3:1 - There is an appointed time for everything. And there
is a time for every event under heaven—
Ecclesiastes 11:2 - Divide your portion to seven, or even to eight, for
you do not know what misfortune may occur on the earth.
Matthew 25:16 - Then he who had received the five talents went and traded
with them, and made another five talents.
Performance and Risk Measures
Current Beta5 of the TDP relative to the S&P 500 is approximately .51
|
As of 09/30/20061 |
2002 |
2003 |
2004 |
2005 |
12/31/2001-12/31/20053 |
Annualized Standard Deviation4 2001-2005 |
YTD 2006 |
| TDP2 | 1.14% | 25.77% | 9.75% | 12.86% | 12.04% | 10.21% | 6.77% |
| SVG2 | N/A | N/A | N/A | 20.48% | N/A | N/A | 6.57% |
| US Bonds | 10.3% | 4.1% | 4.34% | 2.43% | 5.25% | 3.44% | 3.06% |
| US Stocks | -21.6% | 29.44% | 11.95% | 6.12% | 4.79% | 21.18% | 8.02% |
| Gold | 25.72% | 20.93% | 4.81% | 17.76% | 17.04% | 8.94% | 17% |
| Foreign Stocks | -15.9% | 39.17% | 20.07% | 14.02% | 12.51% | 22.83% | 14.91% |
| Hedge Funds | N/A | 11.1% | 3.88% | 2.28% | N/A | N/A | 6.67% |
| US REITs | 5.22% | 37.77% | 30.41% | 8.29% | 19.62% | 18.58% | 22.47% |
| Commodities | 23.87% | 22.66% | 7.64% | 17.55% | 17.75% | 7.39% | -6.21% |
1 Past performance does not guarantee future results.
2 Performance (%) for the TDP and SVG net of a 1.5%/year investment management fee.
3 Compound annual rate of return for period.
4 Standard deviation is a measure of dispersion around the mean value or average return. The higher the standard deviation, the more volatility an asset class carries. The standard deviation for gold, US REITS, and commodities will increase considerably once one of them has a down year!
5 The higher the beta of a portfolio's return relative to the S&P 500's return (the more volatile the portfolio), the greater the risk associated with the portfolio. A beta of 1 would mean that the TDP moves exactly with the S&P 500. A beta of <1 (e.g., .5) would mean the TDP fluctuates less than the S&P 500. A beta of >1 (e.g., 1.25) would mean that the TDP fluctuates more than the S&P 500 as a whole (or is riskier than the market).
What return would an investor require to induce him or her to invest in the TDP, under current market conditions?
5.16% [using the S&P 500's 100 year average compound annual rate of return of 5.25%]
As you can see, the TDP has been a wise choice for our clients over the years, by exceeding the required return (5.16%), with an actual average compound annual return of over 12% (see performance table above)!
To answer the above question we used the "Required Return" expressed as the Capital Asset Pricing Model (CAPM) Equation. We use the most recent data for calculations.
Kc = Rf + beta x (Km - Rf)
Where:
Kc
is the risk-adjusted discount rate (also known as the Cost of Capital);
Rf is the rate of a "risk-free" investment, i.e. t-bills;
click here to see current t-bill rate used in the equation.
Km is the return rate of the S&P 500.
You can think of Kc as the expected return rate you would require before you would be interested a particular investment. The idea is that investors require higher levels of expected returns to compensate them for higher expected risk; the CAPM formula is a simple equation to express that idea.
Many people agree that consistent growth and better preservation of capital are two awesome advantages but they cannot seem to really believe without the data (like doubting Thomas). So I have decided to start comparing the actual performance of a TDP and SVG as managed by Eleven Two Fund Management. Below are the indexes used to calculate the performance of each asset class above in the graph.
1. US Stock - The Russell 3000® Index offers investors access to the
broad U.S. equity universe representing approximately 98% of the U.S.
market. The Russell 3000 is constructed to provide a comprehensive,
unbiased, and stable barometer of the broad market and is completely
reconstituted annually to ensure new and growing equities are reflected.
2. Gold – the one ounce spot price of gold.
3. Commodities - The Dow Jones - AIG Commodity Index (DJ-AIGCI)® is
designed to be a highly liquid and diversified benchmark for commodities as
an asset class. The DJ-AIGCI is composed of futures contracts on 20 physical
commodities (aluminum, cocoa, coffee, copper, corn, cotton, crude oil, gold,
heating oil, lean hogs, live cattle, natural gas, nickel, silver, soy beans,
soybean oil, sugar, unleaded gasoline, wheat, and zinc).As much as 33% of
this index is made up of energy related commodities.
4. Foreign Stock: The MSCI EAFE Index was developed by Morgan Stanley
Capital International Inc. as an equity benchmark for international stock
performance. The Index includes stocks from Europe, Australasia, and the Far
East.
5. US Bond - Measured by the Lehman Brothers Aggregate Bond Index; A
Benchmark index made up of the Lehman Brothers Government/Corporate Bond
Index, Mortgage-Backed Securities Index, and Asset-Backed Securities Index,
including securities that are of investment-grade quality or better, have at
least one year to maturity, and have an outstanding. Par value of at least
$100 million.
6. NAREIT Real-Time Index - The NAREIT Real-Time Index is the only
REIT index to include all REITs currently trading on the New York Stock
Exchange, the NASDAQ National Market System, and the American Stock
Exchange. REIT stands for real estate investment trust.
7. TDP (Truly Diversified Portfolio) - This is a portfolio
diversified into seven or even eight asset classes. I use the TDP to manage
the money my clients have been entrusted with, so that their wealth will
grow more consistently with less volatility than the stock market (or any
other one asset class by itself). Call 1-800-917-5016 or locally in Atlanta
770-642-9373 if you would like to determine how this type of portfolio can
benefit you or if you would like to see real statements where a TDP is being
utilized.
8. SVG (Strategic Value Growth) – This is a portfolio that applies
value investing to the stocks of countries all over the world. This
investment strategy does not hold much in the way of fixed income because
growth is the primary objective. Diversification into undervalued
commodities and precious metals is also used when ETFM believes it is apt.
While this strategy is not as balanced as the TDP it still maintains
diversification into numerous sectors, countries, or asset classes.
9. Hedge Funds - The main S&P Hedge Fund Index (S&P HFI) offers
investors an investable benchmark that is designed to be representative of
the broad range of major strategies that hedge funds employ. The index
currently has 41 constituents from three sub-indices: S&P Arbitrage Index,
S&P Event-Driven Index and S&P Directional/Tactical Index, which in turn
represent a total of nine specific strategies. These strategies include:
Equity Market Neutral, Fixed Income Arbitrage, Convertible Arbitrage, Merger
Arbitrage, Distressed, Special Situations, Equity Long/Short, Managed
Futures and Macro. The strategies are equally weighted to ensure
well-rounded representation of hedge fund investment approaches and to avoid
overrepresentation of recently out-performing or widely sold strategies.
Contact Eleven Two Fund Management
Tel 770.642.9373 Fax 770.804.2076 TF 800.917.5016
thomas@diversifyyourassets.com
885 Woodstock Road, #430-390
Roswell, GA 30075