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Pzena Investment Management - Third Quarter 2012 Commentary

Guest hellsten

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Guest hellsten

Pzena's latest commentary contains a study that should be interesting for everyone contemplating retirement or living off savings:



Is the answer to this challenging question simply to choose low volatility combined with stable returns or is the answer to select an option that produces the best long-term real growth of principal?


To address this issue we have attempted to model three different time periods over the last 22 years to compare the results of a 100% allocation to value equities (cheapest quintile price to book value excluding the most volatile stocks), 100% to bonds (10 year U.S. Treasury Bonds) or 100% to hedge fund of funds (HFRI Fund of Funds Composite Index).


In our analysis we made the following assumptions about our spending rate:

1. Initial spending rate is 4% of the beginning principal

2. Real spending growth is 2% per year (in excess of inflation)

3. Funds are needed equally over the course of the year


The three scenarios we considered were:

1. Starting at the beginning of 1990 and capturing a full cycle of equity returns

2. Buying at the absolute top of the internet bubble (3/1/2000)

3. Buying just prior to the financial meltdown (11/1/2007)



The value equities portfolio significantly outperformed the alternatives of bonds or hedge funds as it supplied the necessary real growth in spending while also out-growing the asset levels provided by its competitors.

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