Disruptive Investing

Exchange traded funds (ETFs) are all the rage. They come large and small, long and short, ultra and supersized, and track just about any sector, geography, investing style or commodity you can think of. The great thing is they trade like stocks yet share some of the characteristics of mutual funds (without the massive overhead some mutual funds carry). ETFs are baskets of like stocks in a particular industry or region or index, and so, if you think for example high tech is going to take off, rather than study and research for which particular stocks to buy, jump on a high tech ETF and enjoy the benefits of spreading out your bet. You might not get as high a return as you could have with that one perfect stock pick, but then again, you have to be a really good stock picker while also bearing the risks of a less-diverse portfolio. Some say ETFs have lower overhead than mutual funds and perform just as well, because of the reduced fees. Some even say during down markets ETFs fair better t...

Figure 1 (click to enlarge) Now, we have defined mutual funds as digital assets that can be distributed thru a virtual network, from source where the value is created and managed, to the retail investors where payment of fees is made (plus information about self is granted) in exchange for that created / perceived value, via the wholesalers, distributors, financial advisors and institutional investing networks. But not all is simple, mutual fund managers must navigate a stormy sea of: • Redemptions (clients departing) • Performance (NAV decreasing, Cap gains & Dividends decreasing) • Risk (volatility increasing) • Asset Allocation (what’s the right mix?) • Modeling (efficient frontier “what ifs”) • Competition (perception of better & best) • Disintermediation / Transparency? • Reputation (least worst performing?) • Future? - How will they perform relative to their peers and other assets such as Hedge Funds and ETFs (Exchange Traded Funds)? – Independent scoring of “Diversificat...

More Alpha please! Less Beta too ... and a side of asset allocation. Diversification weighted asset allocation works well with a pre-filter on selection of asset candidates (perhaps based on money manager experience and talent) and then applying true diversification measurement and analysis to determine the optimal blend of those assets that promise the highest returns while simultaneously reducing portfolio risk. (See What is Risk ?) Let's say we can nearly eliminate systematic risk by using the nine-box style-based diversification (ie. capitalization vs. aggressiveness), while going with geo-politial differentiation and asset class selections (bonds, precious metals, stocks, etc.). Great! Now how do we nearly eliminate intra-style-based risk? Using true quantitative diversification weighted asset allocation. In other words, build a portfolio based on the intra-portfolio correlations (IPC) of the assets. We've found that most portfolios have IPC in the range of 25-35%. True Di...