Portfolio Navigation Update

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.

  1. 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.

  1. 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.

About Frank Sortino

Frank Sortino is finance professor emeritus from San Francisco State University and Director of the Pension Research Institute which he founded in 1981. For 10 years he wrote a quarterly analysis of mutual funds for Pensions and Investments Magazine and he has written two books on the subject of Post Modern Portfolio Theory. He has been a featured speaker at many conferences in the U.S., Europe, South Africa, and the Pacific Basin. Dr. Sortino received his Ph.D in Finance from the University of Oregon and has carried out research projects with many institutions like Shell Oil, Netherlands and The City and County of San Francisco Retirement System.
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