Thursday, February 2, 2012

Evaluating Steadyhand

I had the pleasure of listening to Tom Bradley give an update about Steadyhand mutual funds this week. Instead of trumpeting a few winners, he discussed successes and failures. Instead of avoiding index benchmarks, he showed them beside each of his funds. Instead of pretending he knows what will happen in the future, he told us what modest bets he plans to make for the upcoming year. (Disclosure: Although I have no financial relationship with Steadyhand, I like the guys who run it and they did give me some cheese to nibble on during the presentation.)

I’ve made no secret of the fact that I’m a do-it-yourself investor using low-cost broadly-diversified index ETFs. Nevertheless, I believe that many people wold benefit from investing with Steadyhand, but not for the reasons that people might think. I don’t trust myself to judge who is likely to beat the market. So, I don’t pay much attention to performance. Steadyhand has some funds that have won the race with their index and others that have lost. It’s all close enough to market returns that I focus elsewhere.

But where? If I’m not looking at returns, what is there to look at? One obvious place is fees. Steadyhand has much lower fees than typical mutual funds, and this could make a difference of 20% or more in the size of your portfolio at retirement. Fees are lower still if you control your own portfolio of low-cost index ETFs or mutual funds, but this approach requires discipline that many people don’t have.

This issue of discipline is another benefit of Steadyhand. It is well documented that investors get lower returns than mutual funds report. The typical scenario runs as follows. A small fund has a great year. Many investors leave their old funds and jump into the hot new fund and swell its assets under management. The next year, the fund’s managers can’t figure out what to do with all the money and they have a bad year. So, the bulk of investors’ money doesn’t see the good returns.

People who are guilty of this kind of performance chasing need someone to stop them from buying and selling at the wrong times. I believe Steadyhand does a good job of helping their clients avoid such mistakes. In the long run, this benefit can be even more valuable than the lower fees.

For rational investors who are not trying to beat the market, I believe that low-cost index ETFs and mutual funds are the way to go. For the majority of people who have difficulty controlling their cycles of greed and fear, Steadyhand is a solid choice.

4 comments:

  1. I think you were corrupted the moment you took a nibble of that cheese. :)

    Seriously, I agree: Steadyhand has done an excellent job of promoting the behavioral aspects of good investing, which are ultimately more important than costs and the active/passive question.

    ReplyDelete
  2. @Dan: To get to the debate about costs, it seems that we have to get through a few other steps, such as 1) do you save at all? and 2) do you decimate your returns with cycles of greed and fear? I'd like to see more investors pass these tests to get to concerns about costs and the active/passive debate.

    ReplyDelete
  3. Hi Michael. Big fan of your blog. Just came across this particular post and thought I'd share my reasons for using the SH Income Fund.

    I use TD "e" funds for indexing equities. I really like the simplicity of these products and that I don't need to bother with a Questrade account (or similar), bid-ask spreads, etc. But I've felt increasingly uneasy about using the e version of the TD bond fund given the prospect of rising interest rates.

    The SH Income Fund works very well for me as it provides some hope for slightly better returns from that part of my portfolio, and includes some dividend paying stocks and REITs, neither of which I can gain exposure to through a TD e fund. The MER is pretty reasonable at 1.04 compared to about .50 for TD e bond fund. I like that I only have four funds to manage and rebalance and basically no transaction costs.

    All together, it means I have a well-diversified portfolio of index e funds on the equity side and what I feel (or at least hope) is a fixed income product that will do better than the TD e bond fund. The total MER is about .75, which I feel is still very reasonable given the benefits and simplicity of doing things this way.

    Cheers.

    ReplyDelete
    Replies
    1. @Juan: I'm glad you like the blog. I don't have any useful insight into whether Steadyhand's income fund will outperform the e-series bond fund. I hope it works out for you.

      Delete