Tag Archives: investment

The 60/40 Portfolio Is Dead; Here Is Its Replacement

The following is a proposal I put together for a new client: Click to enlarge As you can see, we do things a little differently around here. Traditional stocks make up less than 40% of the portfolio, with the rest sitting in non-correlated assets outside of the stock market. We invest in everything from options-writing funds to medical accounts receivables and everything in between. The result is that we get most of the safety you would expect from a 60/40 stock/bond portfolio but without the loss of expected return. Our goal is to give you stock-like returns with the risk profile of a blended portfolio. Why Invest in Alternatives? You probably have a good grasp of why diversification is important. Throwing out the financial jargon, it essentially boils down to not putting all of your eggs in one basket. But it also gets a lot more sophisticated than that. Many investors feel that they have adequate diversification because their assets are spread across several stocks or mutual funds. And to an extent, they are right. Owning multiple stocks reduces the risk of downside from any single position. But there is also a major problem with this: Correlation. If Apple (NASDAQ: AAPL ) and Microsoft (NASDAQ: MSFT ) stock prices move together in lockstep, you’re not really getting much in the way of diversification by owning both. And in a real bear market, virtually all stocks drop together. True diversification means owning assets that do not move together. Investment A can go up, down or sideways, and it should have little or no impact on Investment B. This is where the beauty of an alternative portfolio comes into play. We can achieve “stock like” returns in the range of 7%-10% per year without the volatility that comes with stocks. Why the 60/40 Portfolio is Dead Alternative assets weren’t particularly popular in 1980. There is a reason for that. Back then, traditional bonds offered a respectable return. A blended 60/40 portfolio of stocks and bonds offered a solid expected return. Flash forward to present day. At current bond yields, investors will be lucky to get a 2% return in bonds. And compounding the situation, stocks are also expensive by historical measures and priced to deliver sub-par returns. Click to enlarge Accepting a traditional asset allocation is accepting disappointing returns in the years ahead. If you want better performance, we need to look elsewhere. Introducing the New 60/40 Portfolio Sizemore Capital Management custom builds portfolios based on the client’s preferences and eligibility. The following is a sample allocation: Click to enlarge With the market looking overpriced and expected to deliver below-average returns, we need better alternatives. And thankfully, we have them. The following represent Sizemore Capital Management’s expected returns of the assorted asset classes in our model: Click to enlarge We should be clear that these are only estimates. Realized returns will vary and may be significantly higher or lower. But based on current valuations and historical performance, we consider these estimates reasonable. We’re Not Alone While ordinary investors have traditionally invested in stocks, bonds and CDs, wealthy investors and institutions have always had a broader allocation. Consider the case of the Harvard University endowment fund. As of 2015, the Harvard endowment fund had only 3% of its funds in stocks. It has another 18% in private equity and 12% in real estate. The rest is spread across everything from timberland to absolute returns hedge funds. Let’s stop and ask an obvious question: If it’s good for trustees of Harvard, would it not also be good for you? Source: Harvard Endowment Allocation Not all of the alternative investments discussed will be appropriate for all investors. But we believe strongly that every investor can benefit from a proper allocation to alternative investments. Disclaimer: This article is for informational purposes only and should not be considered specific investment advice or as a solicitation to buy or sell any securities. Sizemore Capital personnel and clients will often have an interest in the securities mentioned. There is risk in any investment in traded securities, and all Sizemore Capital investment strategies have the possibility of loss. Past performance is no guarantee of future results. Original Post

Most Factor Anomalies Are Not Persistent

Smart-beta indices are constructed to exploit “anomalies” that reward exposure to risk factors beyond what would be expected as “necessary compensation” under the Capital Asset Pricing Model (“CAPM”). Of course, any factor that results in nominal outperformance must be considered on a risk-adjusted basis, since taking on higher risk should engender a greater reward – and investment researchers at S&P Dow Jones Indices think at least some factor “anomalies” aren’t anomalies at all, but just rewards for greater-than-understood risk-taking. Even still, among the remaining anomalies, the researchers think many are “disappearing,” “statistical,” or “attenuated” – and only a few are truly “persistent.” Writing on behalf of S&P Dow Jones, academic Hamish Preston and S&P Dow Jones Index Investment Strategy professionals Tim Edwards and Craig Lazzara express these views in an October 2015 research paper titled ” The Persistence of Smart Beta .” Disappearing Anomalies Disappearing anomalies don’t last. A great example shared by the paper’s authors is the so-called “Weekend Effect” that was popularized by Frank Cross in 1973. Mr. Cross discovered that if investors had bought stocks at their closing prices each Monday and sold them at their closing prices each Friday – avoiding the weekend and the Monday trading session – they would have dramatically outperformed a “buy and hold” strategy from 1950 to the time of his research. But then, almost immediately after the Weekend Effect became well known, the anomaly didn’t just disappear, it reversed. The Weekend Effect rebounded in 1984, only after another academic research paper called it into question – and then, when a paper called “The Reverse Weekend Effect” was published in 2000, the old Weekend Effect returned. As soon as investors gained knowledge of the Weekend Effect, it reversed. When knowledge of the reversal became widespread, the reversal reversed. Now, it’s taken as a given that the Weekend Effect was a coincidence – hence, it was a disappearing anomaly. Statistical Anomalies Perhaps a better approach is for investors to keep knowledge of anomalies they discover secret – that way, they may be less likely to disappear. This is what David Dolos did when he discovered that applying the price movements of the 1720 South Sea Bubble – second only to Tulip Mania in episodes of old-school irrational exuberance – to the Dow Jones Industrial Average inexplicably produced outsized returns. Mr. Dolos never told anyone about his discovery, and he reaped the rewards in anonymity until 2007, when the system broke down. Why? Well first off, David Dolos didn’t exist. The story is made up, and although the 1720 South Sea Bubble was real, the South Sea Bubble effect was data-mined into existence. As the paper’s authors note, modern computing power can easily produce “false positives” – i.e., anomalies that are purely statistical in nature. In order for an anomaly to be persistent, it must make logical sense. Attenuated Anomalies Momentum is one of the most popular factors. Academic research supports its outperformance, and the concept of momentum stocks – stocks that are going up – outperforming non-momentum stocks makes logical sense. The momentum anomaly is known to anyone who cares to know about it, and yet this knowledge hasn’t caused the anomaly to disappear – instead, it has reinforced it. The downside is that since investors have become aware of the momentum anomaly, its drawdowns have been bigger. This is what the S&P Dow Jones authors mean by an “attenuated anomaly.” In 1997, Mark Carhart published a study that showed adding momentum to the famous Fama-French three-factor model boosted returns. This caused more money to flow into momentum stocks, ultimately leading to bigger drawdowns during crashes. Persistent Anomalies Are there any truly persistent anomalies? The authors say there is at least one: Low volatility. But they conclude with a word of caution: “So far, the investment and attention directed toward low-volatility strategies has not been sufficient to temper their returns or attenuate their risk/return profile.” So far. As the well-known disclaimer goes: ” Past performance does not necessarily predict future results. ” For more information, download a pdf copy of the white paper. Jason Seagraves contributed to this article.

Castlemaine Debuts 5 New Alternative Mutual Funds

Castlemaine Funds is looking to make a big splash in the liquid alts world in 2016 and beyond. Just less than three months after filing paperwork for its first quintet of alternative mutual funds , and clearly undeterred by some high profile fund closures , the firm simultaneously launched all five funds in the final week of December, just in time to ring in the New Year: New Firm, One Portfolio Manager and Five Funds Castlemaine LLC, the investment advisor to each fund, is based in New York City and was formed in 2015. The firm’s Chief Investment Officer and Chief Compliance Officer, Alfredo Viegas, is going to be a busy man. He is the sole portfolio manager for all five funds, each of which employs a different alternative investment strategy. Four of the five funds appear to be making direct investments in securities and building alternative investment portfolios, while the fifth (the Multi-Strategy Fund) invests in a collection of other funds. The Emerging Markets Opportunity Fund seeks high total returns with a secondary goal of generating investment income. Its investments include both long and short positions in equity and debt securities from issuers based in emerging-market countries or countries (such as Hong Kong and Singapore) with economies tied to emerging markets. Castlemaine’s Event Driven Fund pursues an objectives of capital appreciation by taking both long and short positions in equity securities, such as shares of stock and ETFs. The fund focuses on corporate events, such as mergers and bankruptcies, and combines its long/short equity positions with an options-trading strategy and up to 130% leverage. The Long/Short Fund also pursues an objectives of capital appreciation by taking both long and short positions in equity securities and ETFs. The fund invests in both U.S. and non-U.S. equities, and may also use up to 130% leverage, although it will generally fluctuate between 50% and 80% net-long exposure. The Castlemaine Market Neutral Fund invests in stocks, bonds, and options, with the primary and secondary objectives of total return and income generation, respectively. Its long and short positions are designed to cancel one another out on a net basis, providing “market neutral” exposure. And finally, the Castlemaine Multi-Strategy Fund operates as a “fund of funds” across a variety of alternative strategies, including those employed by both affiliated and unaffiliated funds. The fund uses Castlemaine’s “dynamic asset allocation” process in pursuit of optimal diversification and portfolio weightings that reflect prevailing market conditions. The Multi-Strategy Fund will allocate its assets to the following investment strategies: Long/Short Equity Event Driven Market Neutral Emerging Markets Long/Short Macro-Risk Parity Global Macro Unconstrained Bonds Managed Futures Convertible Arbitrage Capital Structure Arbitrage All five funds carry an investment management fee of 1.24%, and each is currently offered in a single share class. For more information, read the shared prospectus of all five funds . Jason Seagraves contributed to this article.