Yesterday the S&P was off .5% and small cap ETFs like VWO were off FIVE TIMES as much. This is happening often across a wide range of small cap ETFs I follow. This is not the time to batten down the hatches but it is time to trim the sails and head for a safe harbor with small craft. Daily volume often runs 50% to 150% higher than average and the market cannot handle that volume. If you are going to venture out in choppy seas, be sure you are on a large (cap) ship. This is the kind of market where active managers can really add value.
Many people are talking about risk in a way that has nothing to do with what is at stake. The myRA bond introduced by President Obama at his state of the union address is the latest example. This 3 minute video is my explanation of what is at stake. The 2nd video is a 4 minute video on Portfolio Navigation. The 3rd video is an interview with the former CEO of The City and County of San Francisco Retirement System and an interview with professor Sam Savage of Stanford University. The full 30 minute video that covers the research findings of the past 30 years is available at the KMVT link below the interview video.
Dr. Frank Sortino discusses a better way to make asset allocation changes than either rebalancing or LDI. (SEE Also November 2012 under Archives)
This is a 5 minute clip from a 30 minute video produced at KMVT Studios in Silicon Valley. (For the full video0 (Click on KMVT Channel.)
Isn’t this just like…(insert phrase) is what we often say when someone describes something new to us. No doubt Einstein heard, “isn’t that just like Newtonian physics”? when he presented e = mc2 . After all, physics is physics. At a much lower level of complexity, we have heard some comparisons that need clarification. The video explains how Portfolio Navigation is different from rebalancing and LDI but it does not address two other faulty comparisons.
- Isn’t this just another form of momentum investing? Perhaps the most notorious form of momentum investing was called Portfolio Insurance, developed by two professors at U.C. Berkeley. It involved a mathematical formula for increasing equity exposure as the market went up and decreasing exposure as the market went down. Yes, Portfolio Navigation does involve mathematics but the underlying methodology seeks to do quite the opposite, i.e., a large rise in the market will cause the DTR to decrease, thus decreasing equity, because you will then need a lower rate of return to achieve your desired pay out. Whereas Portfolio Insurance failed in 1987 because they were trying to unload positions as the market crashed, Portfolio Navigation would be increasing equity exposure after a decline sufficient to increase the DTR. The market place could not accommodate all sellers and no buyers but it would have welcomed our buy orders.
In the study performed ex ante at P&I magazine in 2000 the high tech mutual funds of 1998 were replaced by large cap value and Income and growth funds. With the CIFs managed at Fiserv , the change in the UP ratio and DTR alpha resulted in a decrease in equity in mid 2007.
- Isn’t this just doubling down? A strategy in the Black Jack card game calls for doubling your bet when you lose as a way to recoup losses. Yes, Portfolio Navigation increases equity exposure as the portfolio value declines, but only enough to get back on course to obtain a DTR needed to achieve your desired payout. Doubling the equity exposure would be a crude and foolish strategy.
This video is another clip from a half hour program produced at KMVT in Silicon Valley. The clip is an interview with the former Executive Director of the City and County of San Francisco Retirement System, Clare Murphy; and Dr. Sam Savage from Stanford University.
The important thing to take away from my interview with Clare is the changes she introduced during her 25 year tenure as CEO. As the assets under management grew from $600 million to $16 billion the use of outside active managers grew from approximately 10 to 40 managers. This constituted about 80% of the AUM. This is contrary to the view that the more money one has the more you rely on passive indexes. Clare was on the cover of Institutional Investor Magazine in 2005 and was semi finalist for public fund of the year award.
Sam has written an excellent book titled, The Flaw of Averages. It is the best book on interpreting statistics I have read, and it is written for practitioners, not statisticians. Sam mentions the work of Bradley Efron who received the National Medal of Science award in 2007 for his bootstrap methodology. The National Medal of Science is an honor bestowed by the President of The United States on those who have made important contributions to the advancement of knowledge in the sciences.
Sam says, Efron is one of those rare individuals who straddle a technological divide. Schooled in classical statistics, he inspired a revolution that supplanted it. Efron’s work has been critical to my own. I believe it is a quantum leap forward from what currently passes for estimating “the shape of the future “ Sam describes and what I call the shape of uncertainty.
If you would like to see the complete video go to the KMVT Channel.
Since my last post in November the S&P went to a new high before backing off and the East Asia market declined 4%. I believe the fears of Bernanke beginning to rein in the outrageous debt I mentioned last time is unlikely. He is a student of the Great Depression and knows what happened when the Fed started to rein in liquidity in 1937. He has nothing to gain and everything to loose by repeating that experience.
That being said, the problem has not gone away and the longer we continue the worse it gets. At this point the upside potential out weighs the downside risk and that should lead to another all time high before any major correction.
The video is complete and a 5 minute segment will be added shortly.
Every DC plan participant would prefer a DB plan than what they’ve got. And every DC plan sponsor would prefer a DB plan if they didn’t have the liability of delivering the promised payouts. This is not the impossible dream. Later this month I will be televising a program proposing a way to provide this and for the first time I will be posting parts of the video.
“Why The Economy Could Pop!” screams the headline in the 5 page article in the August 12th issue. Here is the pop quiz:
1. How much has the stock market gone up in the past 18 months?
2. Is the market at an all time high or low?
3. Is there nothing to fear now?
4. What is it that makes small investors buy at the top and sell at the bottom
The author appears to have overlooked these points. For those who are wondering if they should maintain their strategic asset allocation or bet the farm, I offer the following information to ponder:
The Fed’s balance sheet now exceeds $3 trillion and the duration of their portfolio is over 6 years. When interest rates jumped in the 2nd quarter, estimates of the Fed’s portfolio market value declined about $190 billion. The Fed’s capital currently is about $55 billion. Sooo, if interest rates were to jump another 100 basis points, the Fed could be forced to sell some of those long term bonds. Which raises the question, to whom? That could be the start of a very unhappy chain of events that leads to higher interest rates which leads to further forced sales which leads to etc., etc.
Answer to #4: The inflammatory stuff they read in the popular press