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The Soda Can Stove and Investing

My family loves the great outdoors and we try to be in it as much as our schedules allow. A few weeks ago we were able to go camping for a few days before our two boys were due back at school. We had spent the latter part of summer near Breckenridge, Colorado, so we didn't have far to go to escape civilization. Climbing 13,957 ft (4254 m) Pacific Peak was the "pinnacle" of our three-day, two-night trek, providing us wonderful 360-degree views of the beautiful Rocky Mountains. Let me tell you a short story about this trip and how it relates to one aspect of the AlphaGlider way of investing.

We didn't have access to our camping stove as we recently moved back to the U.S. with only a few suitcases. But not to worry, my oldest son Liam (16) said he had a stove that would work great for our trip. Going into summer, Liam made his own stove out of an empty soda can with a design one of his teachers suggested. Liam said it had served him well over the previous month while he worked at a camp high up in the Sierras.

Liam's has always been a resourceful kid, perhaps aided a bit by my wife's and my parenting practices. We pay him and his brother a modest allowance but require them to pay for any of their discretionary purchases. Liam's allowance has never been enough to fully fund his interests so he's always been on the lookout for new ways to earn and conserve money. This may have spurred him to start an egg business with his younger brother when they were younger and why he works during his summers now that he's in high school. And this may be why Liam built his soda can stove.

So at this point you may be wondering where I'm going with this story and how I will relate it to AlphaGlider. Please be patient. Hang with me here.

This homemade camping stove of Liam's is simply awesome. Weighing in at about an ounce (28 grams) and displacing less volume than half a beer can, it is ultraportable. It burns most any alcohol - in our case we used denatured alcohol (ethanol) which set us back about US$7 for a quart (946 mL). It had no problem cooking our full pot of pasta quickly, even at our camp's 12,600 ft (3840 m) elevation. There was no cost for Liam to make the stove as he had all the materials laying around - an empty aluminum beverage can and his handy Leatherman® pocket knife. In exchange for a half hour of his time, Liam now has a stove that is smaller and lighter than, but works on par with, a US$50 ultralight commercial camping stove.

One of Colorado's all too common summer afternoon rainstorms forced us to retire to our tents prematurely on the second night of our trip. While trying to fall asleep well before our bedtime that evening, I got to thinking about Liam's stove. Here was a piece of equipment that was as good or better than its competition in many ways, but cost significantly less. Rarely do such situations persist in our capitalist world, where inferior products are usually run out of town in quick order. The investment fund business seems to be another situation where the "invisible hand" of capitalism has been slow to act.

There was US$8.3 trillion held in U.S.-based equity mutual funds1 at the end of 2014 according to the Investment Company Institute, the national association of U.S. investment companies. Of this amount, around 80% was held in actively-managed funds [2015 Investment Company Handbook]. One would think with their popularity and commercial success that these actively-managed funds would be superior to their passively-managed (i.e. index)2 fund competition. But this is hardly the case. Over the ten years ending December 31, 2014, passively-managed mutual funds convincingly outperformed active-managed mutual funds in nearly all asset class categories. For example, over this 10 year time period [SPIVA® U.S. Scorecard, Year End 2014]:

  • 84.3% of all actively-managed large-cap core U.S. mutual funds underperformed the S&P 5003 index
  • 84.1% of all actively-managed international mutual funds underperformed the S&P 7004 index
  • 70.8% of all actively-managed government intermediate bond mutual funds underperformed the Barclays Intermediate Government5 index
  • 78.1% of all actively-managed U.S. real estate investment trust mutual funds underperformed the S&P U.S. REIT6 index

The problem with the actively-managed mutual funds isn't that their managers are bad, but rather that their fees are too high. The Investment Company Institute tells us that the average equity mutual fund charged 1.33% annually for its management in 2014 [2015 Investment Company Handbook]. Looking at the performance of the field of actively-managed large-cap core U.S. and international mutual funds mutual funds over this 10 year time period, we find that they underperformed their respective indexes by about 1.0% annually [SPIVA® U.S. Scorecard, Year End 2014], well within their average 1.33% annual fund fee. These actively-managed mutual funds don't have a stock-picking problem. They have a cost problem. This is why we primarily use low-cost index exchange-traded funds (ETFs) and mutual funds in our AlphaGlider investment strategies. Most of these funds are from Vanguard and trade commission-free at our independent custodian, TD Ameritrade Institutional. At the time of this blog post, all AlphaGlider investment strategies have blended annual fund fees of less than 0.15%.

This all sounds a bit like the situation in the world of camping stoves. Why pay up for something if you don't get any incremental value from it? Save your hard earned money for things that do add value, like a good independent investment advisor who can wisely allocate your investments across asset classes and control your trading expenses and capital gains taxes - using index funds, of course. In the case of Liam, he puts his savings into making his mountain bike as light as possible. He gets great value from this investment as he tends to ride or carry it to the top of every hill and mountain he can find just so that he can come barreling down them. Here he is earlier this month on top of another nearby peak, Mt. Quandary (14,271 ft/4350 m).

 Photo: Colin Kirkpatrick

Photo: Colin Kirkpatrick

SPEND WISELY. ENJOY THE RIDE.


NOTES & DISCLOSURES

The views expressed in this commentary are exclusively those of the author, and are not meant as investment advice and are subject to change without notice. The commentary does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive it. You should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. There is no guarantee that any investment program or account will be profitable or will not incur loss. You should note that security values may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Individual client accounts may vary.

1Mutual funds and exchange-traded funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained directly from the Fund Company or your financial professional. Be sure to read the prospectus carefully before deciding whether to invest.
2Indices are unmanaged and investors cannot invest directly in an index. The performance of indices do not account for any fees, commissions or other expenses that would be incurred.
3The Standard & Poor's 500 (S&P 500) Index is a free float-adjusted market capitalization weighted index that is designed to measure large cap US equities. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization in the US equity markets.
4The Standard & Poor's 700 (S&P 700) Index is a market capitalization weighted index that is designed to measure the non-U.S. component of the global equity markets. The index covers all of the regions included in the S&P Global 1200 except for the U.S. which is represented by the S&P 500.
5The Barclays Intermediate Government Index is an index that represents the performance of all public U.S. government obligations with remaining maturities of between three and five years.
6The Standard & Poor's (S&P) U.S. Real Estate Investment Trust (REIT) Index defines and measures the investable universe of publicly traded real estate investment trusts domiciled in the U.S.

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