Will My Risk Parity Strategy Outperform?
Robert Anderson (University of California, Berkeley), et al. | July 2012
We gauge the return-generating potential of four investment strategies: value weighted, 60/40 fixed mix, unlevered and levered risk parity. We have three main findings. First, even over periods lasting decades, the start and end dates of a backtest can have a material effect on results; second, transaction costs can reverse ranking, especially when leverage is employed; third, a statistically significant return premium does not guarantee outperformance over reasonable investment horizons.
Estimating The Optimal Rebalancing Rules
Asset allocation and rebalancing are a powerful team with a history of improving the odds of earning a decent return. But in order to harvest the associated risk premium, you’ll have to deal with two big challenges. One is behavioral—rebalancing works best in a contrarian context, i.e., buy low, sell high. The other hurdle is technical—deciding when to rebalance, and by how much.
Book Bits | 8.25.2012
● The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims
By Tamar Frankel
Q&A with author, via The New York Times/DealBook blog
Maybe “Ponzi scheme” should have its own spot in the Dewey Decimal System. Along with biographies of the schemers, a growing stack of scholarly references, legal tomes and articles aims to collect knowledge about this age-old crime. But the latest entry in the category, “The Ponzi Scheme Puzzle: A History and Analysis of Con Artists and Victims” by Tamar Frankel, takes a different approach. While Professor Frankel is a legal scholar who has been on the faculty of the Boston University Law School since 1968, her book explores the psychology of the financial criminals and what makes them tick. She was inspired by a colleague who referred to them as “those mimics of trustworthiness: con artists.” She spent more than a decade researching the book, analyzing more than a hundred Ponzi schemes.
Durable Goods Orders Rise In July, But Business Investment Slumps Again
New orders for durable goods rose by a healthy 4.2% last month, according to the U.S. Census Bureau, but the increase is marred by the ongoing drop in a widely monitored subset of these orders: business investment, defined as new orders for capital goods excluding aircraft and defense. Does the ongoing weakness in business investment tell us that we should ignore the otherwise encouraging news for broadly defined durable goods orders? If there are more clouds on the macro horizon than the top-line number suggests, what does that imply for the economy? In search of some perspective, let’s take a closer look at the numbers.
Closet Indexing In The Age Of ETFs
Ian Salisbury at Marketwatch reminds us that some actively managed mutual funds may be loading up on ETFs. The preference to hold index funds in a portfolio that’s supposed to be a collection of individually chosen securities can be a warning sign that you’re paying actively managed fees for beta. Or in the parlance from the neighborhood of my youth, “You’re getting ripped off, bud.”
Jobless Claims Rise Slightly Last Week, But The Trend Is Still Encouraging
Jobless claims rose modestly last week, the Labor Department reports, but reviewing the numbers in context with recent history suggests that this indicator is still on track to trend positive. New filings for the week ended August 18 increased by 4,000 to a seasonally adjusted 372,000, the highest level in five weeks. But that pales as a relevant factor compared with the year-over-year change for unadjusted claims, which posted a 10% decline as of last week. That’s in line with recent history and an encouraging sign that the labor market continues to heal, albeit slowly.
Fiscal Cliff Risk In Perspective
“It’s the end of the world as we know it and I feel fine.” — R.E.M.
The Congressional Budget Office warned yesterday that there’s a recession coming next year if Congress doesn’t act to soften the blow from the scheduled expiration of tax cuts and automatic budget cuts. The so-called fiscal cliff, in short, is moving closer. What can you do with this information? Nothing. Unless, of course, you’re prone to making decisions today based on forecasts six months or more into the future. But history suggests you should think twice before jumping off the forecasting cliff, regardless of who’s dispensing the prediction.
Strategic Briefing | 8.22.12 | Analyzing Asset Classes
Arnott: Emerging Markets Are Today’s Low-Hanging Fruit
Morningstar.com | August 9
The Research Affiliates chairman discusses why he see value in developing-markets bonds as well as the urgency for investors to build a ‘third pillar’ in their portfolios.
Profiling Success: One Financial Advisor’s View On Asset Allocation & Rebalancing
Ron Vinder, a financial advisor at UBS Financial Services, says he’s doing just fine by managing client portfolios with a broad set of ETFs. Rebalancing the mix is a critical part of the strategy, he explains via Barron’s. “Whenever an asset class does well, that’s when individuals want to buy more. And they want to sell what’s doing poorly.” That’s all too typical, of course, which is part of the reason why the expected premium from rebalancing is so attractive. Indeed, if everyone was diversifying broadly and opportunistically rebalancing, the performance advantage would shrink considerably. But don’t worry: crowd behavior is resiliently rigid—even when the evidence for change is overwhelmingly persuasive.
Forecasting Economic Activity… Just Slightly
Last week’s update of the Capital Spectator Recession Risk Index (CSRRI)—a simple but revealing diffusion index based on a broad spectrum of economic and financial indicators—suggested that the probability was low that July will mark the start of a new recession. A broad review of recent history can reveal quite a lot about the business cycle, but it’s only a beginning. In an effort to peek ahead by projecting CSRRI’s readings for the next several months, modern econometric modeling techniques can help.