Merriman Ultimate Portfolio in Australia

Revisiting the Merriman Ultimate portfolio (thanks @Redwing) and trying to see the relevance for Australian investors:
1. Adding diversification increases return without increasing volatility (beta)
2. Main differences in diversification are in Value and to a lesser degree, REITs, Small Caps, and Emerging Markets.

With the following I don't see why this portfolio couldn't be emulated for Australians:

• VVLU (Vanguard Australia - Vanguard launches active factor ETFs),
• WDMF (Investment Management, Risk & Advisory Services | BlackRock)
• AUMF (Investment Management, Risk & Advisory Services | BlackRock)
• iShares ETFs becoming domiciled in Australia (iShares converts internationally domiciled ETFs to Australian)

Tweak allocations below by splitting the portfolio for example 40:30:30 Australia:World:US (ratio can be bespoke)

• Blend
  • 6% Large Cap Blend (US) - IVV
  • 6% Small Cap Blend (US) - IJR
  • 6% World (Ex-US) - VGS / VAS
  • 12% World Small (Ex-US) - VSO / VSS (US domiciled)
    • IWLD may cover above (??)
• Value
  • 6% Large Cap Value (US)
  • 6% Small Cap Value (US)
  • 6% World Value (Ex-US)
    • VVLU / WDMF / AUMF
• 6% Emerging Market - VGE
• Bonds / Cash
  • 28% Int. Term Bonds (US) *
  • 12% Short Term Bonds (US)
• 6% REIT (US) - DJRE

Very interested in people's thoughts.

 

Holy crap I thought I had a lot of LIC holdings.

Looks like it’s just as easy to overcomplicate it with ETFs

 

Just imagine working a 40 or 50 odd hour week and trying to organise a financial plan using all those bad boys when you get home! I got 4 lics and a etf and thats already plenty!

 

My first thought is, as an Australian based investor. ... that probably the most important question we face in regard our overall outcome is how much of Australia do we invest in domestic markets as opposed to overseas markets.. for us I think thats a question that determines the outcome to a much greater degree than how we slice up that overseas allocation ala this kind of factor and sector based slicing.

And looking at your above hypothetical portfolio... doesnt appear to be a lot of Australia in there???

 

Not a great fan of slice and dice but I’ll have a go keeping MER / Transaction costs low, locally domiciled and portfolio manageable:

BLEND:
... VGS Large / Mid Dev World Ex-Aus
... VAN0021AU Vanguard Global Small Cap
... VAS ASX 300 Large / mid / small Cap

VALUE
... VVLU Large / mid / small Global value

Emerging Market - VGE

REIT (Global) - DJRE

Bonds / Cash:
... Intermediate Global Bond - VBND
... Intermediate Aus Bonds - VAF
... High Interest Cash A/C - Short term Treasuries substitute

 

Thanks for the feedback.

@Snowball - it may look complicated but the numbers say that by adding and maintaining allocation weights the return should be better and the risk similar.

@pippen - I mentioned a weighting of 40/30/30 Aus / US / World but that can be tweaked for your own situation.

@Nodrog - thank you for your very insightful post, which makes this much more manageable.

PS, My post was triggered by some reading about Merriman. My own portfolio is a lot more Australia, large and blend focused (via LICs) so therefore something like this could guide my future purchases as I am probably overweight ASX20.

 

On the tilts you seem to be seeking with the above portfolio. The weight to small is quite large. With the sheer size of the small tilt, would you not worry that this exposure swamps the ability of anything like value ris premia etc to make any impact?

A few academics seem to be of the opinion that small is not a risk factor anyway. I don't really know the truth... i'm just a regular joe and not a finance academic or money manager. But guys like Cliff Assness who have obviously done/seen a heck of a lot more research into factor exposures and risk premia than myself seem to ignore implementing small on large weights as the above portfolio. And rather then tilting small/value instead seem to want to tilt to value/momentum.

In addition... with a focus on small/value... it could all be done/implemented a lot easier just by going the DFA route?

 

Trouble is DFA is advisor only.

 

Merriman's ultimate buy and hold strategy The Ultimate Buy and Hold Strategy 2018 is based off his research. No-one knows if it will work moving forward.

RE: small caps - companies such as Apple and CSL were once small caps (I'm guessing). If you took a large cap weighted approach your portfolio would only be getting these shares once they reached a certain size. If you took a small cap blend / value approach you'd get more exposure to these types of shares earlier in their lifecycle. Small cap does contain crap, so you can go active (value?) or assume that the winners will far exceed the under performance of the losers.

RE: value - there is contention about value investing moving forward https://alphaarchitect.com/2018/06/08/future-factor-investing-may-different-backtested-past/. Backtesting says value is better than growth, but with all of the algorithmic trading in place, and using the assumption that value = active and that for an active winner, there is an active loser, it may not work moving forward - only the best implemented value algorithms will win. At this stage, VVLU is looking good but it's only been around for a very short time.



Food for thought, not advice.

 

Whilst on the topic of value, comparing AUMF (value) and IOZ (cap-weighted index).

 

Paul merrimans latest podcasts on 2 funds for life strategy. Well worth a listen especially if you’re young and just starting your investment journey.


Paul Merriman by Paul Merriman on Apple Podcasts

Paul Merriman by Paul Merriman on Apple Podcasts

 

Personally I’d be increasing the equities and prop exposure to something like 70/20/10 and binning factor exposure. You can build a pretty good sector based portfolio now covering AU, large and small Developed, EM equities.... AU and global reit, listed infra and bonds at sector level cheaply that should present lower turnover than factor stuff at a reasonable price...put together this will do a decent job of lowering correlations as Merriman seeks to do.

 

Important proviso is along as it can be done cost effectively. Added complexity results in increased transaction costs and noticeably higher MER potentially negating any additional reward. Shame Australia doesn’t have the low cost choice offered in US.

 

Other issue with Merriman’s factor / slice and dice porfolio’s Is the difficulty in sticking with it let alone knowing if the past will equal the future.

Maybe I’m old fashioned but simple approach of productive enterprise, real estate and bonds / cash seems like a solid core for a portfolio. Anything else may or may not improve performance but sure as hell it will add to costs, complexity and negative behavioural issues.

 

Correct. So this is the balancing act. Known cost vs possible reward. Add to that product survivability.....

Personally I think that anything factor based is much harder to stick to than simple sectors that seem more tangible.

 

Or for impatient people like myself you can read about it quickly here. Superior long term returns whilst avoiding the usual complexity etc of slice and dice appears to be the objective for the addition of SCV.

“2 Funds for Life” by Paul Merriman and Rich Buck – Paul Merriman

Simple but Interesting Strategy:
... Target Date Fund Allocation = Age X1.5
... Small Cap Value = Remainder

Now as usual the problem of implementing this for an Australian Investor.

A challenge for readers. What’s the best you can come up with for exposure to Small Cap Value? Unlike the US and given how small ASX is in comparison it’s likely “Global” Small Value might be more worthwhile?

The only thing in our portfolio that might have an element of SCV is MIR (ASX Ex-50) but I purchased it for other reasons namely income and diversification away from the highly concentrated large caps.

One advantage of getting older is fortunately this sort of thing is less relevant (was it ever?). Simplicity rules. But it doesn’t mean I don’t find reading about such things interesting.

 

just came across Merriman and had the same thought! @Zenith Chaos curious what you ended up on?

 

I'm also interested in ideas for Small Cap Value funds. Seeking global exposure

 

Nothing listed that’s locally domiciled. There are likely some actively managed funds specialising in this area such as:

Global Small Companies Fund

 

I to and fro on Merrimans methods. You can argue both ways on mean reversion - value will revert back to being better performing OR growth is reverting back to being equal long term to value. Who knows? If you get a chance read "Against the Gods". Classic book on numbers, dense but eye opening on how numbers and probability work.

Also need to think about what is a value stock? In Australia its likely a bunch of resource and mining related stocks. Do you want that?

I suppose for me the argument is: Is it worth paying the extra fees for value stocks when so much of a standard market cap etf includes value stocks? Would i rather just split across three or four low cost ETFs that internationally and market cap diversify and be done with it?

VVLU is the only one of interest to me at the moment, but its hard to justify the 20 basis points difference compared to other ETFs. I kind of feel like for the same fee I'd rather have an Asia tilt and a USA small cap exposure. Something like 50/50 VAE and IJR gets you down to a similar fee to VVLU but gives a lot more diversification.

Who knows what's right though.