The Perfectly Diversified Portfolio, first presented in April of 2017 , has been rebranded the Passive Plus Portfolio. More importantly, the performance profile, clearly a far more important issue than what we're going to call it, remains as strong and stable as intended.
The new moniker underscores the index-based investment strategy for the majority of portfolio, and the "plus" highlights the attempt to boost returns with the secular growth stories of health care and dividend growth stocks, and also the higher growth possibilities in global smaller company stocks.
The design of the Passive Plus portfolio was primarily informed by research into the reasons why index-based passive investing strategies outperform the vast majority of actively managed portfolios.
For instance, positive performance in U.S. equity markets has been driven by a small number of large cap stocks – Facebook Inc., Amazon.com, Netflix Inc., and Google Inc. – and investors not holding these stocks tend to underperform the benchmarks by large margins. Indexing portfolio strategies give investors the best chance to own the companies driving positive performance.
The first chart below charts the performance of the Passive Plus Portfolio in a hypothetical situation where it was applied in late June, 2014. Back-tested results like this should always be taken with a huge grain of salt – it doesn't take much skill to design a portfolio that would have outperformed in hindsight – but the strong performance and low volatility are encouraging for the future.
The table shows returns for each component of the portfolio, with S&P/TSX composite data for comparison. The "plus," growth-oriented section of the portfolio has generated notably strong performance year to date. The iShares Global Healthcare ETF has climbed 16.1 per cent, and the Vanguard FTSE All World Ex-U.S. ETF has climbed 15.6 per cent.
The bar chart, comparing Passive Plus returns and volatility to the S&P/TSX composite, is the most encouraging. At each point in the past three, six and 12 months, the Passive Plus Portfolio has outperformed domestic equities with lower volatility. To the extent investors still believe the classic "volatility equals risk" formulation, this is a very good sign for future returns.
So far so good. It is very, very early days but the industry and geographical diversification provided by using both major North American equity benchmarks and smaller sector-specific ETFs, has resulted in better outright and risk-adjusted returns than for a portfolio consisting of the iShares Core S&P/TSX Capped Composite Index ETF on its own.
Importantly, there's nothing in the performance statistics yet that would tempt me to make any changes to portfolio allocations. Financial research has found a negative correlation between number of transactions and investment returns, so the longer the portfolio retains its "buy and forget" tendencies, this should also bode well.