Our portfolio over the years has been more defensive (less risky, less volatile) than the ACWI index. Especially so in 2011 and 2012. Therefore, it has underperformed in bull market (2009, 2010, 2012) and overperformed in bear market (2011).
So far (starting from end of 2008) the benchmark investment has produced 6% higher returns compounded. This is mostly due to the big difference in returns in 2012. At end of 2011 we were at even with the benchmark.
The difference can be only partly explained by our defensive stance. Most of the difference comes from individual stocks that significantly underperformed the general market. This includes all mining companies and especially the exploration stage companies that got absolutely hammered. Luckily our allocation has been small to the sector overall and very small to exploration stage companies.
Most of my picks from IT sector did also loose to the index in 2012. Since our allocation to IT sector is about third of all assets, I think poor performance in those stocks explains most of the difference between our 2012 gains vs. index gains. Having such a big allocation to one sector is naturally risky and fairly big yearly fluctuations vs. index are to be expected. Our portfolio is slowly shifting to less defensive. Our latest pick (Metso corporation from Finland) can be considered cyclical as well as UPM from Finland, where we also increased our investment.
MSCI ACWI index 2009-2012 (Net; Euros)
I have not calculated our performance during 2007-2008 because we were off the market. During that time and also before that our benchmark index would have been different because the investment objective was different and risk level was much lower.
About the "benchmark investment"
I have chosen to construct my own imaginary benchmark index fund out of MSCI ACWI index instead of choosing one particular index fund that tracks the index. The main reason for this is that I would never invest all our money in any particular fund. I would rather choose several funds managed by several companies that as a whole would track the index close enough. My estimate for average cost level for the benchmark investment is 0.5% per transaction and 0.5% per year.
The index data itself is available via MSCI Barra web site as excel-file at least at the time of writing this post. I use a version of ACWI index which has large and mid cap companies in it. I use it with the following parameters:
- EUR (as in euros)
- Daily (as in daily quotations of the index)
- “Net” (as in “With Net Dividends” that takes into account taxes that you would have to pay before you can reinvest back into the fund. “Gross” option reinvests dividends wholly.)
The benchmark investment is always fully invested into the passive index. Starting balance was invested at end of 2008 to the index. By dividing the money with the value of the index, you get “shares in index”.
About calculating the yearly returns
The yearly return of the index and the "benchmark investment" will be different due to addition of money into the brokerage accounts during the year. The yearly returns are simply calculated as
[balance at end of year N] - [(balance at end of year N-1) + (additions to brokerage accounts during the year N)] / [(balance at end of year N-1) + (additions to brokerage accounts during the year N)]