Saturday 10 February 2024

Investment Bond Asset Allocation Factor Tilt Analysis

Since 'tilting' a vanilla index fund asset allocation to those factors that apparently add excess performance (small vs large market capitalization, values vs growth stocks, etc.) I decided to do a rough estimate of whether or not my current Investment Bond asset allocation has any 'tilt', and if so. is this in the direction(s) that should (theoretically) provide some excess return over the long run.

I looked up each of the four funds using Morningstar, and got the 'style' breakdown from the portfolio risk tab. Using the new weightings that will apply to my asset allocation for future contributions and the annual rebalancing (which will move my IB portfolio to the new asset allocation at the end of May), I calculated the overall 'small vs large' and 'value vs growth' metrics for my chosen asset allocation.

I then looked at the overall allocation to equities (about 90%) and split that into Australia (about 37% of the total allocation to equities) and Global ex-Au (about 63% of the total allocation to equities), to get a 'benchmark' based on suitable indices (the ASX All Ordinaries Index, and the MSCI International (ex Au) Index), and got the style breakdown for each of these indices from Morningstar and calculated the style of a suitable overall benchmark (index) using the 37:63 split.

The results show that my chosen asset allocation is about 50.2% value vs 48.8% growth, compared to the benchmark (index) allocation being about 48.1% value vs 51.9% growth. The figures are not very precise, as Morningstar breaks down the style in Value/Blend/Growth, so for factor comparison I simply assumed that the 'Blend' stocks are 50:50 Value:Growth on average.

The results also show that my IB asset allocation is about 82.4% large vs 16.6% small. compared to the benchmark (weighted index) allocation being about 88.0% large vs 12.0% small. Similar oversimplification of Large/Medium/Small into just Large/Small was done for the purpose of a rough analysis using the available (free) data.

Overall, my chosen Investment Bond asset allocation appears to be 'tilted' about 10% SML (small minus large) and about 5% more towards value.

Looking at the 5-year historic returns for the four funds in my Investment Bond (after fees and taxes), the overall 5-year weighted return for my chosen mix of funds is 8.49% (annual rebalancing might actually improve this slightly over time?).

In comparison the Weighted Benchmark 5-year return after fees was 10.74%. Allowing for the internal tax rate for the Investment Bond being around 25% (it is supposedly slightly less than the headline 30% tax rate, due to some tax optimization efforts - but it is hard to get exact data) this would mean an after fees and taxes 5-year historic return of about 8.06% for the relevant benchmark (index). So, in theory, over the past 5 years my chosen asset allocation has produced about 0.43%pa excess return due to the 'tilt' towards small and value.

An extra 0.4%pa return can have a major impact over the long term due to compounding. It isn't certain that having a 'tilt' towards factors that are believed to provide enhanced returns will pay off in the future -- value stocks have underperformed vs growth stocks over the past decade. But at least my chosen asset allocation is 'tilted' in the (theoretically) 'right' direction ;)

Having some internal gearing included in my asset allocation should also provide a small boost to long term returns (at the expense of having higher volatility). I've seen discussions of back-tested results that claim a portfolio using 5-factor 'tilr' achieved an average of 0.35% excess return over the very long term. It will be interesting to see if my Investment Bond performance over the next 10-20 years outperforms the weighted index (after adjusting for IB tax rates) by 0.3%-0.4% pa. We'll see.

Subscribe to Enough Wealth. Copyright 2006-2024

No comments: