• Bob Van Art

Accumulating Assets with Equilla

Think of three stocks you would like to own. Perhaps “Apple”, “NetFlix”, “MicroSoft”, or maybe one of the popular ETFs. Now suppose two philanthropists were going to give you (tax free) shares of your three favorite stocks. One philanthropist was going to give you 100 shares of each stock and the other was offering 200 shares of each stock. Which offer sounds better to you. It’s not a trick question. We know it is better to own more shares than fewer shares. No matter what the price of the shares if you have more of them your portfolio is worth more.

Aside from out-right share purchases, the way portfolios have achieved physical asset growth (adding more shares) is by reinvesting dividends and capital gains distributions. Equilla provides another avenue for achieving actual asset growth (acquiring more shares) in addition to dividends and capital gains.

Equilla “harvests performance” by selling small amounts of unrealized appreciation from outperforming assets; and then uses the proceeds to purchase shares in lower performing assets within the portfolio. The repetitive process of selling high and buying low actually acquires shares over time. Equilla is a “Net Asset Buyer”. Importantly, because of mean reversion and the cyclical nature of the market, over time Equilla adds shares to all of the assets that she manages.

Equilla is continually converting unrealized appreciation to real shares and adding them to your portfolio. We call those shares the “Equilla dividend” and over time they can really add up. Over a three-year investment period we expect Equilla to increase managed asset holdings (and thereby return) on average 1.4% annually.

Investors are sometimes uncomfortable with the concept of “giving up” return by selling a portion of an asset that is “on a roll”. There is a persistent tendency to want to “let the winners run”. But consider it from a long-term point of view. First of all, you are not “giving up” anything. Equilla changes the representation of value from “unrealized” to “realized” performance. Both “unrealized” and “realized” assets are place holders for value. Is it better to own an intangible asset (unrealized appreciation) which could disappear or a tangible asset (shares) which endures?

Everyone remembers the 4th quarter of 2018. From 12/31/2017 to 9/24/2018 Joe’s portfolio which is pretty conservative, (not a real person but the portfolio is real) was up a bit over $240,000. From 9/25/2018 to 12/24/2018 Joe’s portfolio was down approximately $1,011,000. That’s correct, over $1 million gone in 3 months. That $240k paycheck Joe felt so good about was wiped out 4 times over due to no fault of Joe. This type of wealth destruction happens all too often. Remember Feb. 5th 2018, the 1st quarter of 2016, and the oil scare of late 2015? In each case wealth was destroyed quickly. That is because portfolio return is based primarily on unrealized appreciation, something Jack Bogle of Vanguard called “Speculative Return”. If you need the money during one of these systemic events you could be disappointed.

All portfolios are built relying on the assumption that over time the assets in the portfolio will appreciate. Throughout the history of the stock market that has proven to be true. Equilla does nothing to change that. Portfolios being managed with Equilla participate in market appreciation just as un-managed portfolios. But Equilla does add another dimension to portfolio growth. In addition to market appreciation Equilla will over time, actually add shares to your portfolio.

If you are a long-term investor, you should consider adjusting your investment focus to be both portfolio appreciation and portfolio accumulation. While appreciation is always important, in the long term it is always better to hold more assets. The reason is simple. Assets don’t disappear if the market drops. Sure, each share is worth less but if you hold more shares your portfolio will be worth more no matter what the market dishes out. Here is a simple illustration.

Over time Equilla adds shares to all of the assets she manages

Figure 1

The chart above illustrates a hypothetical portfolio comprised of just four assets (NABZY, CVX, WMB, XOM and UTX). The investment period is from 2006 to 2012 (seven years) so that we include the crash of 2008/2009. Our simulation uses actual daily prices for each asset.

Here are the assumptions. The initial investment is $1,885,559 and it is allocated in the following manner 18%, 54%, 10%, 11%, 7% between the assets. The red line represents the un-managed “Buy & Hold” portfolio.

The blue line represents the same portfolio being assisted by Equilla. The “Buy & Hold” portfolio returned 60.8% over the seven-year period or about 8.6% per year. The same portfolio managed by Equilla returned 76.9% (10.9% per year) 328 bps more per year then the “Buy & Hold” portfolio. If you look at the two lines it is quite clear that both portfolios move in the same manner relative to the vicissitudes of the market. But the blue line remains above the red line and the gap widens over time. That is because Equilla has been adding shares the entire time. Equilla knows it is better to hold more shares than fewer shares.

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