Tuesday, December 19, 2017

The Cheapest and Oldest Actively Management Portfolio in the World

You know the difference between an active and passively managed portfolio or investment fund?  Of course you do. ETFs are passive investment management and if you use a manager (including yourself) who buys shares of specific corporations then you actively manage your portfolio. Active management, say through a hedge fund or a mutual fund or a wealth manager is expensive with fees ranging from 1.5% of assets to more than 20%. So what if I tell you about this actively managed portfolio with investment income coming from all over the world?
The fund’s manager selects the 30 best companies in the U.S. economy. For example Apple. You know that Apple’s income is not just depended on the U.S. economy. It is a global player.  So is Microsoft’s, McDonald’s or Walt Disney’s.  These are all companies in this low cost portfolio.  The portfolio was started as a group of high growth transportation companies in 1882 but later in 1896 it expanded in more general industrial companies.  Initially it was also U.S. focused but overtime it started to expands into the Global economy. I grew up in the Netherlands and we drank a lot of coffee. One of the big Dutch coffee suppliers was Douwe Egberts a company founded in 1753 in a small Dutch town (Joure). Even today, in the town of Joure is the ‘Douwe Egberts’ museum. So how Dutch can you get?  Well, I think it was in the 1970s that it was taken over by a U.S. Company and now it is part of, can you guess?  Mondelez International Brands – a spin off from what used to be Kraft!
GE invests in China, so do many other U.S. companies in this portfolio. The beauty is that they all have to adhere to the highest accounting standards and the strictest rules of security regulation in the world. So much less chance to run into the fraudulent practices you see in emerging markets and other shadier stock markets. Management costs are super low: 0.17%  and this year’s return was 25.98% plus a dividend yield of 1.93%.
The portfolio holds 30 investments, price weighted; the current largest holding is Boeing at 8.19% while Verizon is its smallest holding at 1.47%.  So it is quite diversified not only in stock holdings but also in industrial sectors.  It is not a buy and hold strategy and fund management makes regular adjustments. But not many. Since 1896 it has made around 56 changes. The management team is well known. And over time it has grown tremendously with an average return of around 6% plus inflation. Are you interested?  Why would you buy anything else?
In spite of the few changes, not one of the initial investments remains in the portfolio. The oldest company in the portfolio is General Electric which was added in 1907 and since 2011, 11 out of the 30 investments were added (while another 11 were dropped).
The founders of the portfolio are Charles Bergstresser, Edward Jones and Charles Dow.  Companies for the portfolio are currently selectors by the editors of the Wall Street Journal. Yes, by now you may have guessed that I am talking about the Dow Jones industrial and you can buy this portfolio as an ETF with symbol: DIA-N; its name is SPDR Dow Jones Industrial Average E.T.F.
What is passive about this portfolio that is used as the benchmark for many investment funds? Everyone tries to outperform it, but few succeed. It just shows how simple investment for the individual retail investor can be. For any starting investor, I can’t think of a better investment in the stock market right now. Buy it, put it in a box and you will be taken care of by some of the best-informed people on this planet. Even Warren Buffett has endorsed ‘index investing’ as one of the best ways for retail investors such as us to make money and over time none has a better track record than the Dow.

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