Client Letter – Q1 2013

In December 2012, we launched the Sparrow Wealth Management online vault, which provides a secure location for all of your financial, tax, and estate documents.  So far, about 60% of our clients have logged into the vault using the username and password that we sent via email. For those of you who haven’t logged in yet, please do so soon!  We need 100% adoption in order to use this vault to send your quarterly bills and reports in the very near future (eliminating the need to do this hard copy mailing), but we want to make sure that everyone is logged in and comfortable using the vault first.  The vault can be located on our website (“Client Login” area) or at
During the past year, U.S. stocks and REITs performed exceptionally well, with international stocks coming in with respectable returns also.  The following chart shows the 1-year, 5-year, and 10-year performance of many DFA funds (representing different asset classes) compared to the S&P 500 Index:

Market Returns for the period ending March 31, 2013

 DFA Fund / Index  1 Year Return  5 Year Return*  10 Year Return*
S&P 500 Index 13.96 5.81 8.53
DFA U.S. Large Value 22.53 6.13 10.43
DFA U.S. Small 18.23 10.23 12.73
DFA U.S. Small Value 22.12 8.50 13.61
DFA Real Estate (REITs) 14.24 6.81 12.05
DFA Int’l Large 10.39 -0.48 9.73
DFA Int’l Large Value 6.63 -2.31 11.27
DFA International Small 10.31 2.15 13.46
DFA Int’l Small Value 13.03 1.67 14.37
DFA Emerging Markets 2.63 2.34 17.52
DFA 5-Year Global Bonds 3.65 4.43 3.86
DFA Inflation Protected Bonds 6.24 6.19 N/A

*Note: Returns for periods greater than 1 year are annualized.  Top 3 returns are in bold.

Given how strong the last quarter was, I thought you might like to see the “Timeline of Events: Quarter in Review” slide (see next page).  This slide shows the impact of various events on the MSCI All Country World Index (the worldwide stock market).  The most important thing to learn from this slide is that political events may or may not have a major impact on the markets in the short term.  Either way, the markets are not predictable and our investment strategy is not based on making short term predictions.

The efficient markets hypothesis implies that no active investor will consistently beat the market over long periods of time, except by chance. Yet active managers test the hypothesis every day through their efforts to pick stocks and time markets. The evidence shows that their efforts are not worth the high cost borne by investors.

“The Failure of Active Management” slide (see last page) displays the percentage of actively managed public equity funds that failed to outperform their respective market benchmarks for each major fund category for the five-year period ending December 2012. Most of the fund categories failed to beat their respective benchmark as a group. This is consistent with research, which shows that, as a group, active managers underperform the market by an amount equivalent to their average fees and expenses.

The lone exception is the international small fund manager category during the period. As indicated in the graph, 21% of this group failed to beat the respective benchmark, which is the S&P Developed ex-US Small Cap index. More detailed analysis reveals that many managers in the international small category had significant holdings in emerging market stocks, which is a different asset class that had stronger performance during the period. The large percentage of outperformance among international small managers may result from a large portion of them holding a different asset class and being compared to the wrong benchmark. If the manager group’s average return is benchmarked to an international small cap index that includes emerging markets, the rate of underperformance rises to over 60%, which is in line with the other equity fund categories. (Benchmark is the MSCI All Country World ex USA Small Cap Index.)
Now, in order to comply with the provisions of the Gramm-Leach-Bliley Act, we are enclosing a copy of SWM’s Privacy Statement for your review.  The Privacy Act requires that we deliver this to every client on an annual basis.  In addition, we are enclosing a copy of our Form ADV Part 2, as required by the SEC’s new law. Our form ADV Part 2 is also available on the “Regulatory Compliance” page of our website (

Thank you for your continued trust and confidence.  I had a nice visit to Pennsylvania in March, and I have trips planned for August and October.  Feel free to reach out if you need anything.


Chris signature

About Christopher Jones

Christopher Jones is the Founder and President of Sparrow Wealth Management, a fee-only financial planning and investment management firm. Before entering the investment field, Chris was a management consultant for Deloitte Monitor. He graduated summa cum laude from Brigham Young University with a B.S. in Economics and a minor in Business Management.