rffrydr
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Joined: 30 Oct 2005
Posts: 6670
Location: Sunny California
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 Posted: Tue Apr 08, 2008 12:12 pm Post subject: Scaredy-Cat Investing to the Fore |
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Hopefully market players and invetors can take courage from Soros and return to their rightful place as risk-takers. Here finally arises the system by and for losers--or, perhaps myself if I were filthy rich. Master H. has a Sharpe Ratio for all to envy--and the sleepless nigts to go with it. But to invert the lack of loss for gain would be a sorry direction for this next leg in the market.
| Quote: | How to play safe before the Next Big Thing
By John Keefe
Sunday Apr 6 2008 13:55
In the physical sciences, new interpretations of phenomena's causes and effects can bring complete reversals in world view.
Louis Pasteur revolutionised medicine by showing that bacteria do not spontaneously generate from the air, and physics leapt into the 20th century when Albert Einstein showed that light has the properties of particles as well as waves.
Investment theory too has gone through huge shifts in its points of view, from the efficient-market Capital Asset Pricing Model in the 1970s, to Professors Fama and French asserting dominance for small-cap and value stocks in the 1990s. Since 2002, however, market turbulence and stricter regulation on pension plans have prompted a few managers to devise "minimum variance portfolio", or MVP, strategies whose first aim is not to maximise return, but to reduce the volatility of an equity portfolio.
US academic research15 years earlier led Geneva-based Unigestion, an €8bn asset manager, to devise an MVP for the Swiss market in 1997. European, global and Japanese versions followed, all of which now contain an aggregate €2.7bn ($4.3bn; £2.1bn). In February the firm rolled out a minimum variance portfolio investing in the US market.
"The portfolio construction is counter-intuitive," says Unigestion portfolio manager Fiona Frick. "The technique looks at the problem from the other side, by building portfolios that are less risky than the benchmark, rather than trying to guess at each stock's outperformance." Rather than simply buy a list of low-variance names, she combines stocks that demonstrate healthy volatility but are uncorrelated to each other, and thus produce a portfolio with low volatility overall.
The firm's European portfolio returned 11.9 per cent annually for the three years ended January 2008, versus 10.6 per cent for the DJ Europe Stoxx 600, with about 20 per cent lower volatility. In back tests of the new US strategy, Unigestion's MinVarUS approach beat the S&P 500 in six of nine calendar years from 1999 through 2007, while incurring about three-quarters of the market'svolatility.
Other managers, including Robeco, Invesco, Axa Rosenberg and Union Panagora, have created MVPs in a similar fashion, investing predominantly in the European markets. Additionally, Los Angeles-based Analytic Investors introduced its US Low Volatility Equity strategy in January 2005, and Acadian Asset Management, Boston, began marketing a global portfolio in late 2006.
In executing their low-volatility products, some managers try to boost results by building in decision rules borrowed from their other stock strategies. "We add our return rankings, to be sure that we don't hold stocks where we have a negative view of the fundamentals," says Harin de Silva, president of Analytic Investors.
Multi-manager SEI Corporation of Oaks, Pennsylvania, has created two low-volatility funds to offer investors a long-term equity risk equity premium with lower total risk than conventional equities, especially on the downside, says James Martielli, senior US equity portfolio manager.
Now at $1bn in assets, the global and US funds incorporate the strategies of Analytic, Acadian, and Philadelphia-based Aronson+Johnson+Ortiz.
There is a catch to MVPs. Because portfolios are assembled without regard to market indices, they incur extremely high tracking error versus benchmarks - as much as 8 to 10 per cent. Mr Martielli adds: "We tell clients that if their focus is the quarter-to-quarter results, this is not the right product for them. But over three years it has delivered an equity market return, plus a little more, with less overall volatility and good downside protection."
Critics of the MVP concept point to high fees for an investment process that is somewhat mechanical, and reliance by some managers on third-party risk software for essential steps in stock selection. Moreover, MVP principles can bias the portfolio towards value and mid-cap stocks, and the favourable back tests of strategies may be reflecting the sustained strong performanceof both factors since 2000.
Even though academic research on low-volatility strategies originated in the US, the idea has not gained traction within the US consultant community, with the result that they are not showing the idea to clients.
MVPs' muted volatility should give them a place in liability driven investment programmes (LDI), however, so consultants may become more enthusiastic when funds addressing the US market start to report three-year records.
"They're not meant to match liabilities but, to the extent that equities have a place in LDI portfolios, low-volatility strategies should be a great substitute for conventional index funds," says John Chisholm, co-chief investment officer at Acadian Asset Management, Boston.
MVPs could create savings in risk budgets that sponsors can apply to other return-seeking assets.
"The MVP strategies today are not difficult to manage, and are more alike than they are different, but they're exciting because they meet a need for new approaches to risk," remarks Eugene Barbanegra, senior analyst with SEI in London.
He adds: "Managers are now applying more brainpower to researching risk, and we'll see some very sophisticated products. This is just a first step."*'The Cross-Section of Volatility and Expected Returns', Andrew Ang, Robert J. Hodrick, Yuhang Xing and Xiaoyan Zhang, Journal of Finance, Volatility LXI, No 1, February 2006 |
That these guys come from the hells-a-poppin' far east gives them some cover. And no doubt this style has it's place. But that's for a mature market, an old market....a decrepit market. And what kind of market is that 
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Today is the Tomorrow you worried about Yesterday! |
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