Back to the future with model portfolios

In investing, as in life, it's important to acknowledge when one has made a mistake and to rectify it.

On this occasion, our mistake has been to stop publishing Intelligent Investor's model income and growth portfolios. The rectification is to recommence what we were doing before. Simple really.

To explain why we took them away and why it was a mistake, though, we need to start with a bit of background. The portfolios had been operational for a little over 17 years and had a fine record of beating the market.

So much so that we decided to convert them into funds - our Equity Income and Equity Growth funds - so that members who wished to invest in them directly could do so. This, however, created its own problems. Having a funds management and a publishing operation run by the same team meant we couldn't buy a stock for a fund and recommend it to members simultaneously. We were therefore inadvertently forced to preference one group over the other, which wasn't right.

Separation

The solution, enunciated in Nathan Bell checks into Hotel California, was to formally separate the funds and publishing businesses.

Former Intelligent Investor research director Nathan Bell returned to manage the funds, while the publishing business carried on as per usual. This solved a major problem and set both operations, with a Chinese wall between them, on a better long-term footing.

So far so good, but it put the model portfolios in a kind of limbo. In the end, we decided to let them go with the funds - which they had actually become - and to continue publishing their contents as models for people to follow if they wished. To avoid confusion, we took the painful decision to stop publishing models based exclusively on Intelligent Investor's published research.

After receiving feedback, it's now clear that this was the wrong decision. Members attach more value to these portfolios than we thought - as an integral part of the Intelligent Investor research service, demonstrating how you might use our research to manage portfolios in the real world.

Of course, that's what Nathan is also doing, but like most of our members he's also using other sources and doing his own research, which means the Equity Growth and Equity Income funds will diverge from pure demonstrations of Intelligent Investor research.

That's exactly how it should be - indeed enabling him to do that was a large part of the reason we separated funds from research in the first place - but it does reduce the usefulness of the model portfolios as reflections of Intelligent Investor research.

Shifting back

By shifting the management of the model portfolios back to Intelligent Investor research, we'll be able to correct that. As of today, then, the model portfolios published by Intelligent Investor will be managed by research director James Carlisle and the publishing team. For members managing their own money and following along, we trust that this restores the full value of membership.

This move will also solve a major headache for Nathan, who has had to publish details of his trades even when it might have been more beneficial to investors to keep them private, at least until he has built, or disposed of, holdings.

Of course he will still be publishing regular updates about the portfolios' contents and performance but, by keeping sensitive trades private for longer, he'll be able to manage the portfolios more effectively for investors.

The details of the model portfolios are reflected on our portfolio pages and reproduced in tables below (as they stood on 30 November). They're presented as portfolios of $1m invested on the day the model portfolios originally opened for direct investment on 1 July 2015.

In the next day or two, we'll be conducting a series of trades designed to bring the portfolios back into line with Intelligent Investor research. We'd expect that 10-20% of each portfolio will be switched in a brief flurry before we revert back to our usual long-term (some would say slothful) investing style.

No costs and no interest

In terms of performance reporting, we won't deduct any management fees since the portfolios are intended to demonstrate what members can achieve for themselves using our research. The true cost to members is the annual subscription for our service, but this will vary considerably as a percentage of portfolios, so we think it's best for people to assess this separately for themselves.

If you wish to see how our performance would have been with an annual percentage, then you'll get very close by simply deducting that percentage figure from the stated annual return before costs. As at the end of November, that annual return came to 9.73% for the Model Growth Portfolio since its inception on 7 August 2001, compared to 7.56% for the All Ordinaries Total Return Index, and 12.70% for the Model Income Portfolio since its inception on 10 Jul 2001, compared to 7.62% for the All Ordinaries Total Return Index. 

We also won't deduct any brokerage on trades - largely because this will be more than offset by the fact we don't earn interest on cash holdings, and it makes life simpler to ignore both.

Also as in the past, we'll provide details of portfolio trades in published reviews, which we'll publish when the market is open so we get a 'live price'. We'll also provide quarterly portfolio updates. Any articles relevant to the portfolios should appear on the Portfolio Updates page.

It's understandably irritating for members to have to bear the brunt of errors like this, but I think we got there in the end.

We apologise for the inconvenience. Normal service has been resumed.