Pie Chart Asset Management A Mirage Of Stability

“ Get a hunch and bet a bunch.” we used to quip. But, those days are long gone. Today, socially accepted money management is serious, but boring. Wealth management, as practiced by our major banks, who each manage trillions, is anchored on the S&P 500 index and investment grade bonds. Prescribed ratio followed by all is 60% equities and 40% fixed income paper.

Such a construct is supposed to allow wealthy but conservative families to sleep soundly and participate in the growth and well-being of our country. Past year, this 60/40 ratio proved a disaster as both stocks and bonds declined symmetrically. There was nowhere to hide. Besides, wealth managers never go to extremes. Nobody puts sizable assets in to cash, overweights the NASDAQ 100, or puts serious money in high-yield bonds.

When you compare performance of big players, on a 3 to 5 year basis, which is what clients do, performance variance can run a couple of hundred basis points, and such clients do terminate relationships. You never see breakout, upside numbers because that’s a game played by private operators.

This year looks a little better. Since year end, the S&P 500 has rallied strongly with breakout performances by big capitalization growthies like Tesla, Meta Platforms, Microsoft and Apple, Amazon snapped back 50%. All such outperformance coulda been captured by owning NASDAQ 100, but I’ve never seen wealth managers go this route.

In bonds past 12 months investment grade corporates held their own. Same for the high yield sector, yielding 7% or so, for BB grade bonds. Treasuries, market, at least for me proved frustrating. I bought a ton of 2- year Treasuries selling at a premium to 10-year notes, and watched this spread widen to a 30-year record.

I may be one of the few jerks losing serious money, owning 2-year Treasuries. Don’t worry. I’ll break even in 2-years, but it’s a trial of opportunity cost and could prove substantive.

Safety An Illusion

In Pie Chart Asset Management

In the pie chart here, large capitalization equities, approximate 40% of assets with U.S. fixed income issues another 31% of assets in stocks. Everything else just provides cosmetic energy to portfolio composition but isn’t meaningful or pivotal for performance numbers. Who cares about 2% of assets in Japanese stocks with global equities, at 1% ( gimme a break.)What looks profound is silly and has no impact.

But there’s a very critical performance factor can be missed year-over-year. Confining equity investments to an index like the S&P 500 forgoes any intra year changes in specific asset sectors like technology. Its move this year covered a few months.

The display below captures enormous changes that take place in sectors cycle-to-cycle. Note technology in 1990 was insignificant, but a decade later was a major sector, equivalent to financials, and greater than healthcare. Energy has shrunk to insignificance along with utilities and materials.

Active money managers strive to capture such fundamental changes, year-to-year, cycle-to-cycle. Being committed solely to the S&P 500 Looks good on paper but falls short.

In summary, the typical asset allocation pie chart is a misleading, pretty picture that lures in passive investors.

The reciprocal of passive institutional money management is Warren Buffett who owns tons of Apple and Occidental Petroleum. I hated his bank stocks which he pared down, but did hang in for decades.

If your portfolio renders nights sleepless, sell down to the sleeping level, (Bernie Baruch), Bank money management has eliminated sharp elbows, but hides in boring mediocrity. JP Morgan and its ilk won’t take you to the moon or even protect you in a troublesome setting like past year.