Asset Allocation for Twelve Sector Funds

Asset Allocation for Twelve Sector Funds

Issue:  Under an asset allocation investment strategy, an initial allocation is assigned to all assets in a portfolio and the portfolio is rebalanced from time to time to maintain the original composition of assets.   The rebalancing can be at scheduled dates or whenever the portfolio manager observes large changes in relative asset prices.

The original allocation of assets is maintained by selling assets that do well and buying assets that do poorly.   This approach can backfire.   A hedge fund manager who bought horse and buggy stocks and sold car stocks after the introduction of the car would not have done well.  However, asset allocators who sold internet firms prior to the tech bubble in the late 1990s did quite well.

Question:   Table one below has stock price information on 12 sector ETFs offered by Vanguard for three dates – 7/1/13, 7/1/16, and 6/29/18.

Using this price data, calculate the average annual return between 7/1/13 and 7/116 and the average annual return from 7/1/16 to 6/29/18 for the 12 funds.

What do these annualized return statistics suggest about the likelihood of success of an asset allocation strategy, which starts out with equal shares of the 12 ETFs on 7/1/2013 and rebalances on 7/1/2016.

Adjusted Close Stock Price for 12 Sector Funds
Symbol Fund Description 7/1/13 7/1/16 6/29/18
VDC Consumer Stables 93.55 133.53 134.27
VDE Energy 103.12 88.25 105.08
VFH Financials 38.12 47.48 67.45
VHT Health Care 86.84 133.78 159.14
VIS Industrials 79.06 106.53 135.81
VGT Information Tech 73.07 112.61 181.42
VAW Materials 82.52 104.33 131.56
VNQ Real Estate 56.70 84.58 81.46
VOX Communications Services 68.28 94.02 84.92
VPU Utilities 72.52 106.33 115.96
GLD Gold 127.96 128.98 118.65
SLV Silver 19.14 19.35 15.15

A note on calculations:   The return between two dates is obtained from the formula (APt/ APt-n(1/n)-1

The first period is three years and the second period is two years.   (n is 3 for first period and 2 for second period.)

The table below sorts the funds from least to highest annualized return during the first period.

Annualized Rate of Return for 12 Funds
Symbol Fund Description July 2013 to July 2016 July 2016 to July 2018 Diff.
VDE Energy -5.1% 9.1% 14.2%
GLD Gold 0.3% -4.1% -4.4%
SLV Silver 0.4% -11.5% -11.9%
VFH Financials 7.6% 19.2% 11.6%
VAW Materials 8.1% 12.3% 4.2%
VIS Industrials 10.5% 12.9% 2.5%
VOX Communications Services 11.3% -5.0% -16.2%
VDC Consumer Stables 12.6% 0.3% -12.3%
VPU Utilities 13.6% 4.4% -9.2%
VNQ Real Estate 14.3% -1.9% -16.1%
VHT Health Care 15.5% 9.1% -6.4%
VGT Information Tech 15.5% 26.9% 11.4%


Information Technology, the best performing fund in the first period, was also the best performing fund in the second period.  This asset allocation strategy would have reduced holdings of an asset, which continued to out-perform all other assets in the portfolio.

Energy, the worst performing fund, in the first period, had a return 3 percentage points over average of the 12 ETF returns in the second period.

Four of the six worst-performing sectors in the first period realized improved returns in the second period.

Five of the six best-performing funds in the first period had worse returns in the second period.  (The only exception is the previously mentioned information technology fund.)

The median annualized return in first period was 10,9 percent.   Only four funds had annualized returns over this level in the second period.

Two sectors – financials and information tech – are positive outliers in the second period.  However, financials have underperformed in last few months.

Concluding Remarks:   Information Tech, the best performer in both time periods, did spectacularly in the second period.  Asset allocators sold the best fund.

Asset allocation strategies tend to work more consistently when the investor holds broader funds, including both the overall stock market and debt funds.  Subsequent research will look at situations where asset allocation provides better results.

Authors Note:  Interested in financial problems caused by student debt.   Take this quiz on student debt trends and proposed policy changes.

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