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Life used to be simple.  There was the S&P 500 Index, the MSCI EAFE Index, the Russell 2000 Index, and the Lehman Brothers Aggregate Bond Index.  Benchmarking performance was simple, but crude. 

Now there are literally hundreds of equity and fixed income indexes.  (For the record, in the Morningstar database as of April 30, 2008 there were 235 indexes, and there are many others not in the Morningstar database).  Benchmarking performance is complex, and now much more precise.

Interestingly, among those 235 indexes, only a handful represent a multiple-asset portfolio.  How odd.  It is the central role of advisors and planners to build diversified portfolios using stocks, funds, and exchange traded products from a wide range of asset classes. Yet, there are precious few “portfolio” indexes against which to benchmark the performance of a “portfolio”.  How do advisors gauge the performance of portfolios in the absence of a reliable benchmark index?

The analysis below contrasts existing portfolio indexes and introduces a new index, the 7Twelve Index:  The 7Twelve Research Report

Craig Israelsen has published a 40+ page research report on the 7Twelve asset allocation model.  The report contains detailed analysis and outlines several alternative versions of 7Twelve.

Click here for more information a multi-asset global portfolio that uses 12 funds or exchange traded products to cover 7 asset classes.
 
Presently there are 5 multi-asset indexes in the Morningstar Principia database:

Dow Jones Conservative Portfolio
Dow Jones Moderately Conservative Portfolio
Dow Jones Moderate Portfolio
Dow Jones Moderately Aggressive Portfolio
Dow Jones Aggressive Portfolio

The composition of each Dow Jones Portfolio is described in the appendix.

The risk and return characteristics of each Dow Jones Portfolio is shown in Figure 1.  Just as theory would suggest, as risk increases (as measured by the worst 3-year annualized return over the 10-year period from 1998-2007) return also increases.

Also included in Figure 1 is the 7Twelve portfolio.  It seems to defy theory.  Its 10-year annualized return of over 11% (from 1998-2007) is associated with a worst 3-year return of nearly +6%.  The S&P 500 Index is also included in Figure 1 as a reference point.

The year-to-year performance of each of the portfolio indexes, as well as the S&P 500 Index, is shown in Figure 2.

The 7Twelve portfolio is very straightforward.  It does not employ exotic tactical strategies, and was not designed by an optimizer.  It simply utilizes 12 broadly diversified funds in equal weighted allocations (actually 11 funds and one exchange traded note).  At the start of each year, each fund is rebalanced back to 1/12 of the portfolio value.  Tax-efficiency of the portfolio is maximized by using new cash inflows to accomplish the annual rebalancing.  The 7Twelve portfolio is more diversified than most portfolios, including the Dow Jones Portfolios. 

The 7Twelve portfolio utilizes the following asset classes:  large cap US equity, midcap US equity, small cap US equity, non-US developed equity, non-US emerging equity, global real estate, natural resources, commodities, aggregate US bonds, inflation-protected bonds, non-US bonds, and cash.

Figure 1.  Risk/Return:  10-Year Period from 1998-2007

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