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How We Gain a Performance Advantage No Matter What the Markets Do – Part II

Scott's Column

In my last blog post I talked about the importance of controlling fees and expenses in a portfolio.  In this post I will tell you how we do it at First Ascent and give you an example of the huge benefits that clients could receive through this process.

The Fix is Straightforward

Here’s how we incorporate this reality into our investment process.  We look at:

  • the internal expenses of the funds and ETFs we use
  • the fees charged by the portfolio manager
  • trading and rebalancing costs

Here’s how it works.  Our Global Explorer 60 portfolio has an internal expense ratio of 20 basis points.  Let’s compare that to a hypothetical competitor, the XYZ firm, that has a balanced portfolio with an expense ratio that equals the expense ratio for the average balanced mutual fund.  That’s .78 basis points.  In this category, we save our client 58 basis points.

We manage portfolios for a $500 flat fee regardless of account size.  Our average account is about $300,000.  So our fee is about 17 basis points for our average account.  Let’s say the XYZ firm charges 50 basis points, which is a pretty standard fee in our industry for a $300,000 account.  We have saved our client another 33 basis points.

Our Global Explorer portfolio has 9 holdings—5 ETFs and 4 mutual funds.  We pay $6.95 for ETF trades and $24 for mutual fund trades.  In the first year, our trading costs are $130.75.  For our average account of $300,000 that equals about 4 basis points.

If the XYZ firm builds its balanced portfolio using 16 positions and those positions are all actively managed mutual funds, the total trading costs to set up this portfolio is $384 or about 12 basis points for our $300,000 account.  This gives us another 8 basis point advantage.

This benefit translates into our rebalancing strategy as well.  We don’t typically have any rebalancing costs in the first year of a portfolio’s existence.  If XYZ reviews its portfolios monthly and trades 4 of it 16 positions during the year, that gives us another 3 basis point advantage.

In our example, we saved our client just over 1% per year over our hypothetical competitor, the XYZ firm.  The difference is not a few pennies.  Saving 1% annually could fund years of additional retirement for your clients.  And we did it by paying attention to things that we control.  That’s a performance advantage you get regardless of what happens in the markets.

Simple is Beautiful

We work hard to keep our fees and expenses low.  We could easily hold more positions and we could sprinkle in some liquid alts or some cool little funds that you have never heard of.  If we did, our portfolios might look more complex, which, to some people, might suggest more sophistication.  We think it takes more effort and more sophistication to build an elegantly simple portfolio.  As Leonardo Da Vinci said, “Simplicity is the ultimate sophistication.”