I’ve been working on modifying a spreadsheet at work that tries to backtest certain portfolios, namely fundamental indices versus cap-weighted indices versus actively managed mutual funds all in one shot and with different assumptions. Note that backtesting has its limitations though, while the numbers look good in retrospect there is no way to account for market impact, tracking error, etc.
Having Said That…
One sample that I thought I would share with you is a comparison of a portfolio of the five different mandates mentioned in the previous posts this week with the f-class management fee deducted from the annual returns for the FTSE RAFI fundamental indices and with the cap-weighted ETF MER deducted from the cap-weighted total returns. This is designed as a comparison for “fee-based” advisors who charge a separate client advisory fee so that they can see the approximate “after-management fee performance” of the two strategies. Again, I have to re-iterate that back-testing does not account for market impact and tracking error, so the real world performance difference may have been different and perhaps to a material degree. Also, this is in no way a recommendation for a portfolio allocation (though I’ve seen much worse!). :)
(You can click on the graph for a larger version)
Thanks for sticking with the blog during this week of charts and graphs. Back to some more regular posts next week… :)