Pete Martin has worked with many institutions, helped them manage trillions of dollars in assets, and also helped build a massive hedge fund with folks at MIT. So we asked Pete a simple question: what makes for a great equity portfolio – maybe even the perfect one?
Below is what we learned.
Hard to say, according to Pete, given everyone’s preferences and objectives are different.
That said, it’s easy to see reasons Trefis High Quality portfolio strategy (HQ) is preferred by individuals and institutions alike – and why Pete is excited about helping bring it to clients.
Here is the summary of 5 reasons why Pete thinks HQ is interesting:
1. Performance.
| Returns* | |
| HQ (See more) | 100.24% |
| Benchmark^ | 75.95% |
^Benchmark: 30/40/30 Russell, S&P Mid, S&P 500
*Since HQ Inception, Sep. 30, 2020, to Dec. 31, 2024
HQ turned $100,000 invested in September of 2020, into >$200,000+ as of the end of 2024. About 18% annualized return since inception, and a total return since inception of over 100%. Not bad. You can learn more here. This is compared to about 76% for the market benchmark that included all 3 – Russell, S&P midcap, and S&P 500. Benchmark is described below
2. Benchmark
What we compare HQ’s performance with, matters. HQ’s benchmark for comparison includes all 3 large categories of the market to try to represent a full basket of US equity exposure. Specifically, HQ’s benchmark is 30% Russell 2000, 40% S&P Midcap, and 30% S&P 500.
The S&P 500 itself is now skewed more than 35% by the magnificent 7, so this all-cap benchmark really doesn’t have the same diversification problem that the S&P 500 has been criticized for lately.
3. Composition & Diversification
30 stocks, all equal weight. That’s how HQ is composed. Compare that with the 35% or more of the S&P 500 that’s concentrated in the Magnificent 7 – and many market scholars have recently voiced concern – well, what are the other 493 doing in there?
Why 30? Simply, because the benefits of diversification taper off meaningfully after 20, and you don’t get much after 30.
4. Upside vs downside
Why and how has HQ outperformed? By protecting wealth, and not losing money.
For every dollar that HQ’s market benchmark goes down, HQ has lost much less – on average only about 75 cents, and for every dollar that the benchmark goes up, it has made about 90 cents.
As Glenn Caldicott the CIO of Empirical, credited with launching the world’s first insider portfolio in the 90s says: you lose 50%, and you need 100% gains to make up for your loss. Let that sink in! The best way to win long-term is to not lose too much. Of course, we learn that in 2nd-grade arithmetic with the charm of how percentages work – a 20% loss needs to be paired with a 25% gain just to make you whole.
5. Process, Quality, and Philosophy
HQ stocks are really what the name says: quality companies, sustainable revenue growth, strong margins, and cash flow-producing firms. They have defensible balance sheets that have helped HQ weather market storms. HQ has a median market capitalization of over $20 billion, and no pick of less than $2 billion in market value.
We’ve focused on making very few decisions ourselves – instead, we let the machine bear out the right decisions with strong data. In a nutshell, we followed one principle – understandable AI. Human && Machine. How does that work?
The overall process is data-driven, and is combined with human intuition and gut check – so we verify, and audit everything. We wrote at length here – Investing with Understandable AI – and would love your feedback. Especially as we look to continue to improve HQ!
Great – what’s next?
Hope you use the above 5 criteria to evaluate your own favorite equity portfolio. Do compare HQ with whatever else you want – any other app or offering out there – whether a specific index or portfolio you love – Magnificent 7, or Nasdaq, or S&P, or Betterment, Wealthfront, or if you still swear by Cathy Wood’s ARKK. We’ve made all the comparisons since our very beginning in September 2020. If you find things that have worked better for you – tell us about it. Of course, you can reach us and find out more about HQ here.
