As the name may suggest, a "No-Brainer" portfolio (NBP) is a straightforward portfolio comprising a few asset classes implemented using low-cost index funds. The term was first coined by investing legend William Bernstein in his book The Intelligent Asset Allocator. Bernstein proposed a four-fund NBP.
25% Short-term Bonds
25% of International Stocks (Bernstein is based in the U.S.)
25% Small-Cap Stocks
25% Large-Cap Stocks
In this blog, we will examine this approach from a U.K. perspective and evaluate how it has historically performed when compared against alternative solutions.
Abraham Okusanya (creator of the retirement planning tool Timeline) constructed a U.K. implementation of the NBP and published the results. For his 2017 analysis, he took a mix of global equities and bonds, applied a fee of 0.5%pa, and rebalanced annually. He created portfolios with differing ratios of global equities and bonds to cater to varying risk appetites. Risk and return are broadly linked (see #5 of our investing beliefs), and the chart below shows this, with the lines of the NBP (and other offerings) sloping from the bottom left to the top right as returns and corresponding risk increase.
The chart also shows how the NBP fares against other offerings, and Abraham was his usual straight-talking self in the report.
"A key conclusion of the report is that the vast majority of multi-asset fund managers deliver worse risk-adjusted returns than a simple market portfolio. And they charge clients very high fees for the privilege.
To put it bluntly, it’s daylight robbery! Sadly, just like the Window Tax, it’s entirely legal. Strangely, the tax remained in place for more than 150 years and was only abolished in 1851! If that record is anything to go by, multi-asset fund managers are probably rubbing their hands with glee!"
We will now construct a portfolio similar to Abraham's and see if our findings are similar.
The FTSE Global All Cap Index will represent equities. This includes around 9000 stocks, from small to large cap, covering developed and emerging markets. The Bloomberg Global Aggregate Index will represent bonds. This index contains over 10,000 investment grade and government bonds worldwide. We will rebalance our portfolio quarterly and apply a fee of 0.3-0.6% to broadly reflect how a real-world solution would perform (we have a lot more historical data for the indices than the funds).
In the chart above, blue is the real-world fund, and red is the theoretical, index-based funds over the last seven years (when the youngest fund in our real-world portfolio was launched). We use 40%, 60% and 80% equity asset allocations. The risk and return are close enough between theoretical and real-world for us to have the confidence to use our theoretical model to look further back in time.
Asset Risk Consultants (ARC)
The ARC PCI Indices gather returns from over 100 Wealth Managers, allowing you to compare risk-adjusted performance. ARC offer four categories with differing risk levels. These risk bands are comparatively wide, but we can compare the ARC results on a risk-adjusted basis to the theoretical NBP as we did above.
In the 5, 10 and 15-year charts above, the theoretical NBP portfolio is shown in red and ARC in pink. There are several takeaways.
NBP has outperformed the ARC indices.
This outperformance is more noticeable at higher risk levels.
This outperformance has been more noticeable in recent years.
Note that we only use 3 of the 4 ARC "bandings" that most closely align with our NBP risk levels (excluding ARC Cautious).
There are a couple of caveats to the above analysis
Some contributors to ARC include more than just investment costs, which will drag on their performance. Only fund costs are assumed in the theoretical NBP.
The usual disclaimer, past performance is not a reliable indicator of future performance, most certainly applies here.
Criticisms of the NBP
No investing solution is perfect, and over the years, I have seen many comment that the NBP has benefitted from favourable tailwinds for equities and bonds. While that has certainly not been the case for bonds (as pointed out in our article on rebalancing) in recent years, it's always worth bearing in mind that asset classes can go through long periods of relative outperformance (and underperformance).
It's also worth mentioning that the NBP does not utilise "factor tilts" in the equity part of the portfolio (FTSE Global All Cap) and might be more susceptible to the overall equity markets falling if we have a rerun of the .dot com bubble. We looked at the subsequent lost decade in our article on investing for the long term.
As we pointed out in a previous article, we believe that Investment Management is commoditised and that most investors will be best served by keeping costs low and investing in globally diversified portfolios, the NBP being just one example. We would suggest that clients of financial advisers/investment managers ask for their investments to be benchmarked against the NBP in addition to ARC and other alternatives.
If you want to learn more about building a robust retirement plan using an evidence-based investment approach, please contact us.
The team at Pyrford Financial Planning are highly qualified Independent Financial Advisers based in Weybridge, Surrey. We specialise in retirement planning and provide pension advice, investment advice and inheritance tax advice.
Our office telephone number is 01932 645150.
Our address is No 5 The Heights Weybridge KT13 0NY.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
Although best efforts are made to ensure all information is accurate, you should not rely on this blog for your personal situation or planning.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.