Occasionally I get asked why I don’t write about indexing on The Compound Investor. It’s a good question, and I may do going forward. I mean, two of the most popular assets in 401(k) retirement plans are the Fidelity 500 Index Fund (FXAIX) and the Vanguard 500 Index Fund (VFIAX). There are tens of thousands of individual accounts out there that have $1m-plus stashed in these things. 

If you aren’t a stock nerd like me – and let’s face it, most folks aren’t – then go ahead and stuff your retirement and tax-sheltered accounts full of something like FXAIX. Relative to the amount of additional legwork required – basically zero beyond earning the cash in the first place – you will, in all likelihood, compound ahead of inflation and create yourself real tangible wealth.

Considering the expense ratio for FXAIX is like 0.015% per annum, the above makes for a pretty good deal. Oh, and you’ll still end up with constant economic ownership of some of the best firms known to man. Although the weightings may change pretty often, the likes of Disney, PepsiCo, McDonald’s, Coca-Cola and so on will always be in there somewhere. Heck, those four alone have well over 200 years of unbroken S&P 500 membership between them.

The Voya Corporate Leaders Trust Fund

The question of indexing got me thinking about the Voya Corporate Leaders Trust Fund (LEXCX), previously known as the Lexington Corporate Leaders Trust. Although the name sounds as dry as anything, the story here is one of the most interesting you’ll come across. It was founded back in 1935 with the simplest mandate in the world: buy, and then hold. That’s it. No more stocks allowed. No constant rebalancing all the time. Heck, Union Pacific stock makes up like 35% of its assets.

Obviously the initial purchases were informed by the experience of folks in the Great Depression. Banks were not included for example. The initial constituents – thirty in total – were seen as bluey blue chips at the time. Original names still held include Procter & Gamble and General Electric.

Here’s the funny thing. Today, the fund holds around twenty names all together. A handful of the original constituents went bust over the years – understandable given the timeframe involved. The total number of equities in the portfolio also fell due to merger and acquisition activity. For instance, you’ll see that Berkshire Hathaway is in there despite not being an original constituent. That is because it acquired BNSF Railway Company, which itself had merged with the Atchison, Topeka and Santa Fe Railway, one of the fund’s initial holdings, back in the mid-1990s.

Other names that stand out on that basis include Comcast, Chevron, Exxon Mobil and ViacomCBS. The two oil giants trace their history all the way back to Standard Oil Company of New Jersey and Standard Oil Company of California. Comcast, despite only existing since the 1960s, can trace its membership back to American Telephone & Telegraph (the original AT&T). The current incarnation of AT&T – a favorite of contemporary dividend investors – also makes the present list of holdings. ViacomCBS has literally only existed for a couple of months in its current form, however it traces its inclusion all the way back to Westinghouse Electric Company, an original fund constituent, which purchased CBS back in the mid-1990s.

You could actually go on like this for hours. And that’s before breaking those companies down into their constituent parts. I mean, AT&T owns the likes of CNN, HBO and Warner Brothers. Exxon Mobil is also one of the world’s largest chemical companies. Berkshire Hathaway is a sprawling conglomerate that owns chunks of Coca-Cola and Wells Fargo, as well as wholly-owned subsidiaries like GEICO. And so it goes on.

Returns

At this point, you are going to expect a big number in terms of the fund’s overall return. We are talking about 85 years of compounding here. I’m not sure if there’s data going all the way back to 1935, but according to the trust’s 2018 Form S-6, $10k invested in 1941 would have been worth around $21,500,000 at the end of 2018. That  figure assumes continual reinvestment of dividends and capital distributions. It has, over very long timeframes, outperformed the S&P 500.

Just think about how counterintuitive this all is. No Amazon, Apple, Microsoft or Alphabet stock to juice returns. Heck, there are no technology stocks at all. Yet none of it mattered one bit: the Voya Corporate Leaders Trust Fund has still outperformed the benchmarks. Now, at this point I have to be a bit careful because we are obviously picking up on a winner here. Extrapolating this and making a ‘thing’ out of it runs the risk of falling for survivorship bias. Or put another way, how many funds constructed like LEXCX didn’t survive?

Research from Dr. Jeremy Siegel showed that a portfolio containing just the original S&P 500 constituents outperformed the index when measured over a long enough timeframe. I’m not sure when his work was last updated, but my understanding is that other studies have shown the same thing. The one thing to takeaway? Tinkering with your portfolio too much is detrimental to returns.

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