As most clients and readers know over the course of 2020, we revisited our asset classes and ran an efficient frontier analysis to determine if we still have the long-term historical returns to justify our investment decisions. As a part of that analysis, we found a case for including an overweight to foreign healthcare companies.
To implement these findings in January of 2021, we added 26 individual healthcare stocks to our Foreign allocations. The 26 companies we picked represented between 59.12% when measured by iShares Global Healthcare ETF (IXJ) and 50.11% when measured by iShares MSCI ACWI ex U.S. ETF (ACWX) of all foreign healthcare stocks. This also represents 61.90% of the companies and 90.06% of the cap-weight of healthcare companies from our Freedom Investing funds.
In our Comprehensive level client portfolios, we implemented this strategy by purchasing an equal weight of each of these 26 companies. For most clients, we then either held those positions through the rest of the year or engaged in some tax-loss harvesting. Because of the different initial purchase dates and different capital gains management plan, each client’s returns from this strategy differed significantly.
In this analysis, I have used the actual products in which we invested with returns ending December 31, 2021. I have not modeled any fees associated with purchasing or holding the security with the exception of fees already included in the Morningstar return. To make a fair comparison to the benchmark, we’ve used total return which includes dividend reinvestment. In client portfolios though, we reinvested dividends elsewhere.
For the “Initial Equal Weight” portfolios, I have calculated the return of a portfolio initially invested in an equal weight and then allowed to drift over the time period. In this way, the 3-Month Initial Equal Weight return is a portfolio where the holdings were purchased in equal shares on October 1, 2021 and then allowed to drift through December 31, 2021.
For the “Equal Weight Rebalanced” portfolios, I have calculated the return of a monthly rebalanced equal weight of the holdings. This is not the strategy we implemented, but I have included it to demonstrate why we do not recommend frequent rebalancing on the individual stock level.
For a benchmark, we are comparing this to the healthcare sector of the MSCI All-Country World Index Excluding the United States (MSCI ACWI Ex USA/HC GR USD). This is a benchmark index and not an actual product. As of writing this, there does not exist an affordable fund which tracks the foreign healthcare index.
|3-Month||6-Month||9-Month||1-Year||Q4 2021||Q3 2021||Q2 2021||Q1 2021|
|MSCI ACWI Ex USA/HC GR USD||0.11%||-1.78%||8.01%||4.18%||0.11%||-1.89%||9.97%||-3.55%|
|Initial Equal Weight Portfolio||2.52%||1.65%||11.32%||12.82%||2.52%||-1.92%||8.06%||3.07%|
|Equal Weight Rebalanced Portfolio||2.45%||0.00%||7.80%||11.60%||2.45%||-2.39%||7.80%||3.52%|
An initial equal weight strategy of these 26 companies implemented on January 1, 2021 and held without further buys or sells through December 31, 2021 had a +8.64% advantage over the foreign healthcare benchmark.
There are two ways we differed from our benchmark which may explain this advantage. First, we focused our investing in countries high in economic freedom and did not include allocations to the companies in the benchmark which are in less free countries. Thus, some of the advantage may be due to the Freedom Investing factor.
Second, we purchased our allocations in an equal weight while our benchmark has its holdings weighted based on market capitalization (cap weight). When we purchase an equal weight, we are overweighting mid and small companies compared to the cap weight of our benchmark. Thus, part of the advantage may be attributed to the Size factor.
Then, there is also always the third option which is the advantage may be attributed to luck.
Buying and holding had an advantage over rebalancing. This is because while sectors don’t go bankrupt, there do exist companies which are deteriorating. If you rebalance your equal weight, you would add more money into a company as it declines and bring down your return more than if you’d just held and let it drift. The same thing is true on the up-side. Some companies are hitting it big and if you trimmed them in rebalancing you would hurt your return. You can read more about this in “The Dangers of Individual Stock Investing.”
From January 1, 2021 through December 31, 2021, the three worst 12-month returns were the Canopy Growth Corp (CGC) in Canada with a return of -64.57%, Ambu A/S ADR (AMBBY) in Denmark with a return of -42.61%, and Koninklijke Philips NV ADR (PHG) in Netherlands with a return of -30.91%.
From January 1, 2021 through December 31, 2021, the three best 12-month returns were Straumann Holding AG ADR (SAUHY) in Switzerland with a return of 78.66%, Novo Nordisk A/S ADR (NVO) in Denmark with a return of 62.55%, and Icon PLC (ICLR) in Ireland with a return of 58.84%.
Investors used to ETF investing may dislike the volatility that can be seen in individual stock investing. Watching each individual company go up or down can be a bit like watching a sausage get made. Investors not used to seeing it may dislike the experience. While these returns appear large, they are within normal market volatility for an individual company.
Grouped by country, here is how an equal weight of each country represented in our strategy performed in time periods ending December 31, 2021 and by quarter in 2021:
|Holdings||3-Month||6-Month||9-Month||1-Year||Q4 2021||Q3 2021||Q2 2021||Q1 2021|
|Australia Initial Equal Weight||4||4.64%||4.44%||9.59%||15.68%||4.64%||-0.40%||5.98%||5.50%|
|Canada Initial Equal Weight||2||-18.94%||-34.86%||-42.88%||-15.91%||-18.94%||-23.85%||-16.07%||41.29%|
|Denmark Initial Equal Weight||6||0.30%||-5.39%||9.80%||9.70%||0.30%||-6.69%||13.71%||1.03%|
|Ireland Initial Equal Weight||1||18.20%||49.82%||57.71%||58.84%||18.20%||26.76%||5.27%||0.71%|
|Netherlands Initial Equal Weight||1||-17.08%||-25.86%||-34.38%||-30.91%||-17.08%||-10.58%||-11.50%||5.28%|
|New Zealand Initial Equal Weight||2||-12.62%||-3.99%||-13.61%||-15.52%||-12.62%||11.22%||-10.43%||-1.28%|
|Switzerland Initial Equal Weight||7||13.21%||17.06%||35.33%||31.03%||13.21%||3.28%||16.19%||-3.48%|
|United Kingdom Initial Equal Weight||3||4.89%||-2.71%||13.16%||10.04%||4.89%||-7.38%||16.45%||-3.32%|
|Initial Equal Weight Portfolio||26||2.52%||1.65%||11.32%||12.82%||2.52%||-1.92%||8.06%||3.07%|
Photo of Switzerland by Nolan Di Meo on Unsplash. Returns data gathered from Morningstar Advisor Workstation.