The Abacus Investment Approach
Investing globally and including real estate potentially provides a
higher more stable return than using stocks and bonds alone
It is possible for an investment portfolio to create positive social
and environmental impact without sacriﬁcing ﬁnancial returns
Include low cost, diversiﬁed strategies (like index funds, only better)
Invest more in small stocks and under-valued stocks, because
both have been shown to increase returns over time
Build a disciplined and thoroughly researched investment
program based on Nobel-Prize-winning academic research
instead of emotions and hot tips
The striped areas
show how many funds
were still in business.
During the ten year
period, only 52% of
Even worse, the blue
box is the number of
funds that both
survived and beat
their benchmark, only
19% over the ten year
So, how do you
identify one of the
So you agree that avoiding hot tips makes sense. How do you choose an investment manager?
This chart shows that over time, it’s very difﬁcult to pick a manager that stays in business and
outperforms their benchmark. The grey boxes represent the total mutual fund population that
existed one, ﬁve, and ten years prior to 12/31/13. The ﬁrst question is, how many of these funds were
still around at the end of 2013?
Find a good money manager!
Beginning sample includes funds as of the beginning of the one-, five-, and 10-year periods ending in 2013. The number of beginners is indicated below the period label. Survivors are funds that were still in existence as of December
2013. Non-survivors include funds that were either liquidated or merged. Outperformers (winners) are funds that survived and beat their respective benchmarks over the period. Past performance is no guarantee of future results.
See Data appendix for more information. US-domiciled mutual fund data is from the CRSP Survivor-Bias-Free US Mutual Fund Database, provided by the Center for Research in Security Prices,
University of Chicago.
Pick a past winner!
Many Wall Street experts proclaim that ten years is long enough to get rid of the lucky
managers and leave only those with great skill.We looked at the best equity funds over a three,
ﬁve and seven-year period and picked those that beat their benchmarks.Then we looked at how
those past winners did over the next three years.
Across the board, only a quarter
of the winning funds continued to
beat their benchmarks in the
subsequent three-year period
(2011–2013), regardless of how
many years they had won in the
past.That kind of drop would turn
the 17% number from the prior
slide to less than 7%.
So, in summary, the research
shows that most managers aren’t
any better than a simple index,
and you can’t ﬁnd the 7% that will
end up doing better by looking at
The sample includes funds at the beginning of the three-, five-, and seven-year periods, ending in December 2010. The graph shows the proportion of funds that outperformed and underperformed their respective benchmarks (i.e., winners and losers) during the
initial periods. Winning funds were re-evaluated in the subsequent period from 2011 to 2013, with the graph showing the proportion of outperformance and underperformance among past winners. (Fund counts and percentages may not correspond due to
rounding.) Past performance is no guarantee of future results. See Data appendix for more information. US-domiciled mutual fund data is from the CRSP Survivor-Bias-Free US Mutual Fund Database, provided by the Center for Research in Security
Prices, University of Chicago.
When things get bad, get out!
After 1 year After 3 years After 5 years
Balanced Strategy: 7.5% each S&P 500 Index, CRSP 6-10 Index, US Small Value Index, US Large Value Index; 15% each International Value Index, International Small Index; 40% BofA Merrill Lynch One-Year US Treasury Note
Index. The S&P data are provided by Standard & Poor’s Index Services Group. The Merrill Lynch Indices are used with permission; copyright 2014 Merrill Lynch, Pierce, Fenner & Smith Incorporated; all rights reserved. CRSP data
provided by the Center for Research in Security Prices, University of Chicago. US Small Value Index and US Large Value Index provided by Fama/French. International Value Index provided by Fama/French. International Small
Cap Index compiled by Dimensional from StyleResearch securities data; includes securities of MSCI EAFE countries in the bottom 10% of market capitalization, excluding the bottom 1%; market-cap weighted; each country capped
at 50%; rebalanced semiannually. Indexes are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of
future results. Not to be construed as investment advice. Returns of model portfolios are based on back-tested model allocation mixes designed with the benefit of hindsight and do not represent actual investment performance.
If we can’t ﬁnd a good manager, at least we should be able to predict that when bad things
happen in the world, we should stay away from the markets. Or maybe we can’t. We looked at
six of the worst world events in the past 25 years to see what effect they had on the market.
We found short term drops with pretty amazing ﬁve year performance after the event.
Here’s the punchline: If your emotions tell you to run away from the market, ignore them.
Performance of a Normal Balanced Strategy: 60% Stocks, 40% Bonds - Cumulative Total Return
If we can’t trust past performance
or our emotions, how do we create
We found Nobel Prize winning
research that identiﬁes four factors
that affect the majority of stock
1. Relative price as measured by the price-to-book ratio; value stocks are those with lower price-to-book ratios.
Small cap premium – small vs large companies
Equity premium – stocks vs bonds
Value premium – value vs growth companies
Profitability premium – high vs low profitability companies
Most of the investment management
industry exists to say,“hire us and we’ll pick stocks better than the other guy.”
The overwhelming evidence is that this activity is an economic waste of time because
any ﬁnancial return from this activity pales in comparison to the effect of these four
Sometimes two of the factors above are described more colorfully as Small (company
size) andValue (relative price).
Structure Determines Performance
Structure Determines Performance
1. Beta: A quantitative measure of the co-movement of a given stock, mutual fund, or portfolio with the overall market.
2. Price-to-Book Ratio: A company's capitalization divided by its book value. It compares the market's valuation of a company to the value of that company as indicated on its financial statements.
3. Direct Profitability: A measure of a company’s current profits. We define this as operating income before depreciation and amortization minus interest expense, scaled by book equity.
By carefully structuring portfolios to take advantage of these dimensions, you
can tilt toward the Small, Value and Proﬁtability dimensions that can increase
your expected returns.
World Stock Market Capitalization
As of December 31, 2014
Market cap data is free-float adjusted from Bloomberg securities data. Many nations not displayed. Total may not equal 100% due to rounding. For educational purposes; should not be used as investment advice.
China market capitalization excludes A-shares, which are generally only available to mainland China investors.
Abacus diversiﬁes client assets across most of the world’s stock markets, often owning thousands of
stocks in a typical portfolio.We currently allocate 40% of total stocks to foreign companies.
Non Agency MBS
US Investment Grade
Bonds - The Ballast of your Portfolio
Allocation Credit Quality
Abacus aims to earn clients a healthy yield from bonds while not taking on excessive credit
risk from companies or governments with a poor future outlook, or excessive interest rate
risk by investing in long term bonds.
We diversify our bond allocation in an attempt to provide protection from inﬂation as well as
declines in individual sectors of the bond market.
REITs around the
globe provide core
exposure to real estate.
We also offer private real estate
investments to accredited clients.
Oppenheimer SteelPath MLP: MLPs earn income by owning the means of
transportation for natural gas and oil (pipelines, shipping, trucking).
A Sample Portfolio
U.S. Stocks 30% International Stocks - 20%
Alternatives - 10% Bonds - 40%
DFA US Sustainability
Core I (DFSIX)
O'Shaughnessy All Cap
Core I (OFAIX)
DFA US Targeted Value
DFA Global Real Estate
Securities I (DFGEX)
MLP Select 40 Y(MLPTX)
DFA Intl Sustainability
Core 1 (DFSPX)
DFA International Small
Cap Value I (DISVX)
DFA Emerging Markets
Core Equity I (DFCEX)
DFA Investment Grade I
DFA Two-Year Global
Fixed-Income I (DFGFX)
PIMCO Income Instl
DoubleLine Total Return
Bond I (DBLTX)
DFA Short-Duration Real
Return Instl (DFAIX)
Abacus offers a variety of portfolios tailored to each client’s required rate of return, ability to accept risk, social values, and current income needs.
DFA US Sustainability: A broad
exposure to the US stock market
with innovative environmental
O'Shaughnessy All Cap:
A multi-factor value fund with a
unique approach to
DFA US Targeted Value: Owns many of the smallest
and lowest-priced (“value”) companies in the U.S.
This is how we capture the Small &Value premiums.
DFA Intl. Sustainability: A broad
exposure to the stock markets of
developed countries around the
world with the same
environmental screens as the U.S.
DFA Intl. Small Cap Value:
Captures the Small and
Value premiums in
DFA Emerging Markets Core: Exposure to stocks
in emerging economies around the world. These
investments have higher volatility but a signiﬁcantly
higher expected return than US stocks.
Grade, DFA Two-
Year Global & PIMCO
These three funds offer broad
exposure to the government and
corporate bond markets with a focus
on credit quality and low duration.
Doubleline Total Return: Exposure
to the vast real estate debt market,
with its different investment
characteristics than other bonds.
DFA Short Duration Real Return:
A short-term corporate bond fund that protects from rising inﬂation.
The ﬁgures above reﬂect the hypothetical past performance of model portfolios. These model portfolios are similar to those used
currently by Abacus for its clients. However, these particular models have not always been used by Abacus. The models used may change without notice at
any time. The model portfolios were developed in part by examining past risk and return relationships, and may beneﬁt from hindsight.
The ﬁgures shown do not represent past performance of any actual portfolios, including those of Abacus clients. Neither
Abacus nor its predecessor ﬁrms were in business for the full time period shown above. Abacus and its predecessors may have used different models with
clients during the time periods shown. Different clients may have followed different models. Clients following the same model may have had different actual
holdings and different performance. These model results do not reﬂect any impact that material economic or market factors might have had on the adviser’s
decision making if the adviser were actually managing clients’ money.
These performance ﬁgures are shown net of mutual fund expense ratios (where mutual funds were used), but include no
such costs where index returns were used. The ﬁgures are net of an assumed 1.2% per year reduction to cover trading costs, custodial costs, and
Abacus management fees. The effect of taxes is not reﬂected in these results, and inclusion of tax costs would reduce the illustrated returns.
The ﬁgures shown are not intended to represent potential future performance of actual or hypothetical clients, portfolios,
models, or asset classes. Future results may vary substantially from past results, due to a wide variety of uncontrollable and unpredictable factors.
These factors may include market changes, military or political events, economic or societal changes, and many others. The performance statistics assume
annual rebalancing at the end of each year, whereas actual client accounts may be rebalanced at irregular times based upon a number of factors. Actual client
portfolios may never exactly match these models nor any models used in the future to guide their construction.
The historical model performance illustrated derives from a number of assumptions. Asset classes were included in each model
according to the percentages shown above. Annual rebalancing is assumed, along with immediate reinvestment of all income and capital gains. Asset class
returns were measured using mutual fund returns where available (i.e. about 10-15 years for most stock funds), and index returns where mutual fund returns
were not available (i.e. earlier years). The performance results reﬂect the speciﬁc mutual funds and indices we selected. Other indices or funds may be
available to measure returns in one or more asset classes. Index returns do not include actual costs of investment.
Actual portfolios or models used by Abacus from time to time may have included more, fewer, or different asset classes or
funds. Each of the model portfolios includes an allocation to equity, real estate, and other securities purchased with an emphasis on capital appreciation
rather than primarily seeking income. The various underlying funds and asset classes may ﬂuctuate dramatically, and this variation in individual asset class
returns is not visible in the aggregate results presented here. The model portfolios include allocations to small capitalization stocks,“value” stocks,
international stocks (including those issued in countries considered to be emerging markets), and other asset classes which may exhibit signiﬁcant volatility in
returns when each is examined in isolation.
The performance for Abacus Model Portfolios is illustrated along with the performance of selected indices, for comparison
purposes. The composition, returns, and volatility of these indices vary widely from that of the model portfolios. The indices were chosen to illustrate
the performance of individual asset classes within the US securities markets, and because the Abacus Model Portfolios are comprised of multiple asset
classes, results are not directly comparable. Index returns do not include the actual costs of investment or taxes, and including these costs would reduce the
returns shown for the indices.