The Holy Grail of mutual fund investing back in the ’70s and ’80s was the concept of a computerized “black box” that would move money in and out of mutual funds in anticipation of future market moves. It was a search for anything that could time the markets. With most people being “newbies” to the practice of investing in mutual funds, this had an obvious attraction.
Bear in mind that until then, the typical investor investing in stocks did so largely through retail brokerage firms selling individual stocks and bonds. The advent of 401(k) plans changed everything, as the investing public was essentially force-fed a diet of mutual funds covering the spectrum of investment types — from money market funds to select industry funds such as technology, foreign funds, precious metals and everything in between. With more households now exposed to stocks, many 401(k) participants became self-styled investment experts and were seduced by the promise of “computerization” and what it could accomplish.
Market-timing services launched themselves with newsletters such as “Market Timer,” and companies promoting market-timing prowess found willing investors looking for something to yank them out of the market just before it tanked. One “black box” offering just a hint of market timing was the underpinning of Wells Fargo Bank’s Asset Allocation Fund — a top-performing fund in the late ’70s that moved money incrementally between different asset classes. The allocation was based on a computerized model designed by some Wells Fargo portfolio analysts working with Stanford’s Nobel Prize-winning William Sharpe. Later involvement included the investment think-tank, Barra Corporation in Berkeley — a firm that also helped to refine what has become today’s “modern portfolio theory.” To be clear, the model differed from classic market timing — a term that describes removing funds totally from market exposure and which subsequently attempts to repurchase at the bottom of the market.
Meanwhile, Jack Bogle, the founder of Vanguard, is dismissive of market timing today, but in his 1994 book, “Bogle on Mutual Funds,” he acknowledges that a computerized investment model may, in fact, be able to add value, but that the jury was still out. He did admit that Vanguard had introduced what by then was known as an “asset-allocation fund.” Virtually all of the pure market-timing organizations had fallen by the wayside by then because it only takes one poor timing mistake to trigger a mass exit of investors.
So, Vanguard ventured into the world of the unknown in 1988 and introduced its asset-allocation fund, which it eventually gave up on years ago, and rolled the money into a balanced index fund. The original asset-allocation fund entered the dust bin of financial services history.
But the model that worked for Wells Fargo until they sold it to another institution still has life, thanks to a handful of the original ’70s-era analysts who played a role in its initial development. A small company, located in Auburn, manages money using Vanguard’s index funds in the different asset categories, and allocates assets as indicated by the original model. The model run at www.spectrumcap.net has remained as constant as the speed of light and has resisted any attempts to tamper with the original formula.
The performance of the Spectrum balanced account (60-70 stocks/30-40 bonds) over the past 10 years, for example, has been on par with typical balanced funds ranked in the 80th to 90th percentile by Morningstar. The difference in this case is that clients of this small local company have the luxury of talking anytime with the people actually making the allocation decision — one that is nudged in various directions on a quarterly basis based on the dictates of the model.
The lesson here is that often any strategy will work if given enough time. The common mistake is often one of switching advisers or strategies as soon as they under-perform in a given market. Years ago, the average tenure of an adviser-client relationship was just three years — a little less than the four- to seven-year length of the average stock market cycle. It’s a reflection of the typical investor for whom immediate gratification “takes too long.” A time-tested computerized model along with some human interaction might be useful to someone who could benefit from some reassurance in a world of uncertainty.