In a year where the Dow Jones Industrial Average returned a negative (2.2%), the S&P 500 index returned a negative (.73%) and the NASDAQ Composite Index grew by roughly 5.73%, it should prove satisfying, for those holding the model portfolio, to open their statements and determine that the Model Large Cap Account produced a 2015 return of 12.35% US, NET of all fees and expenses. This was, yet again, world-beating performance; the portfolio returns surpassed ALL of the Morningstar “Fund of the Year” candidates, be they domestic, foreign or international, for 2015.
The magnitude of the absolute outperformance, coupled with the relative return continues to validate the long held portfolio mantra that prudent stock selection, methodical allocation, limited turnover and avoidance of fads in the large cap space is neither unfashionable or unprofitable, merely overlooked.
A $1 million US investment in the model account, on the date of inception of July 18th, 2000, is now worth $14.49 million US at the close of 2015, net of all fees and expenses. In EACH & EVERY year, of the 15 + years of the portfolio’s existence, the account had demonstrated below average volatility when compared to the key peer market indexes. Turnover of the account had also been dramatically lower than average, to the point that some investors had initially questioned, on occasion, whether or not their portfolio was, in fact, actively managed. Over time, such objections have been, clearly, put to bed.
The author and portfolio manager continues to hold to the view that ownership of high quality companies possessing strong balance sheets and earning superior EBITDA margins, when situated in sectors that benefit from clear-cut secular growth drivers, are very attractive places for long-term capital to be invested.
Investment media as well as many investment managers would have us believe that every waking moment requires fretting as to the potential effects of terrorism, revanchist thugs, despotic CEOS or unscrupulous accounting departments well versed in chicanery, to produce profits out of thin air. In contrast, the global large cap portfolio tries its best not to own companies where undue attention needs be paid to the aforementioned. Gains are too hard won, and too readily lost, when one pursues a goal of capital accumulation based upon little more than whimsy or hope.
Attention to balance sheets and to secular trends, when coupled with rigorous upfront evaluation of corporate strengths, has resulted in a portfolio composition characterized by little historic need for position removals based upon disclosures of bad news or unanticipated negative announcements. Prudence inevitably trumps speculation in flat markets.
The account endeavors to own proven success stories rather than frothy dross, cyclical stories or fallen angels. This time-tested approach has proven to be a rather quiet, but quite roaring, success story for all invested. Those that currently maintain capital in the model have been rewarded with significant wealth accumulation over the years. It is not now, nor has it ever been, an entry level account.
Some have attempted to cherry pick certain investments from the portfolio in DIY accounts or through unauthorized vehicles. In doing so, they have determined, to their chagrin, that such an endeavor simply produces a sub-optimal return. The quest of the DIY investor to own an entire account comprised of “low hanging fruit” is itself a risk; the lowest hanging fruit is generally the first fruit to hit the ground, rotten. All that I will tell cherry-pickers, when pressed, is that the securities that produced superior returns in 2013, were NOT the account drivers for 2014. The best performers in 2015 were also different than in the prior two years. Who knows what 2016 will bring? Rising interest rates in the United States may prove to be a somewhat novel factor, to those invested in equities.
The account is globally capped at no more than 49 potential persons. Throughout calendar 2015, only one spot became available and was immediately snapped up. At the date of this report, there are NO account openings available for new investors; the cap is firm.
A waiting/contact list IS maintained for those who are qualified, both financially and by temperament. Like-minded, fundamental, long-term individuals are always welcome to reach out, bearing in mind that the author does not provide specific personal commentary on investments with the public at large.