Word for the week is alternatives.
"Success has no other shortcuts apart from the ones that tell you; control thoughts, delete negativity, alternate actions and shift attitudes to become positive! Click on passion, it opens a new window for you to sign in on time!" Israelmore Ayivor
"Peace is not the absence of conflict but the presence of creative alternatives for responding to conflict - alternatives to passive or aggressive responses, alternatives to violence." Dorothy Thompson
"What is freedom? Freedom is the right to choose: the right to create for oneself the alternatives of choice."
In continuation of the last two weeks updates, we will continue to look at what brings added value in investment portfolio construction.
We have looked at the outperformance that has been added in focusing on fundamental outcomes of looking at value oriented investment decisions rather than chasing high returns through growth oriented investing decisions.
Buying value and rebalancing value has been shown to provide long term benefit.
Second we looked at how managing downside risk and avoiding deep drawdowns during times of stress could add to long term performance.
The focus upon defensive strategies outperform by giving added stability during times when markets reach stress points and become highly volatile.
Today the focus is on how diversification through adding alternative assets and alternative management strategies can be shown to add stability and return to portfolio construction.
Defining Alternatives, or Alternative Strategies.
"At Ibbotson Associates, we define alternative investments as asset classes or investment strategies that are outside of traditional stock, bond, and cash categories and that generally display different performance characteristics than these traditional investment categories. It is the different performance characteristics, or low correlations, that make alternative investments a potentially beneficial addition to a traditional portfolio."
"Our definition of alternative investments can be further broken down into two subcategories."
"Alternative Alpha-Investment strategies that have low correlations to traditional investments. Examples would include long short equity, merger arbitrage, and managed futures."
"Alternative Beta-Asset classes that have low correlations to traditional investment. These would include commodities, private equity, and Treasury Inflation-Protected Securities."
Scott Wentsel, CFA, CFP Vice President,
Senior Portfolio Manager, Ibbotson Associates®
Lucian Marinescu, CFA Consultant,
Marrs Wealth Management's "Stability Rating" on Fund Managers, includes factors in relation to the S and P 500 stock index, which may provide for return that has low correlation, while adding value through diversification. These factors include; yield greater than four percent, expense ratio one or lower, annualized return since inception above four percent, standard deviation below ten percent, Beta below sixty percent, Alpha greater than two percent, Sharpe ratio above seventy percent, up capture higher than down capture and an Asymmetry Ratio above seventy percent.
The following chart demonstrates how various funds using alternative strategies could be evaluated in order provide a range of factors that may add value to portfolios through diversification. Some strategies even appear to provide a negative correlation increasing stability in the overall portfolio allocation.
The asymmetry ratio study brings extra insight to long term performance as the up capture may be even lower than down capture however and still significantly add to portfolio return.
It is more important to limit extreme down turns than to capture all of the upside return of the market. This is counter intuitive however mathematically sound.
It may be even more important to integrate alternative strategies into portfolios given the level of current interest rates and the likelihood that bonds will not provide the same benefit as in the last 30 years of falling interest rates?
The S and P 500 index trended down last week. - 1.02%
The Dow Jones World Index trended down last week - .76%
The 10 year Treasury Yield index trended down last week.
The US Dollar index trended down last week. - .88%
The CRB Commodities index trended down last week. - 1.07%
The Gold Index trended up last week + 1.24%
Inflation Linked Bonds trended up last week +.55%
US Aggregate Bond Index trended up last week + .28%
The International Aggregate Bond Index trended up last week
The NCREIF Index is aggregated and reported quarterly and is a total return broad representation including rents and appraisal of non-traded Commercial Real Estate.
2014 2nd qtr + 2.91%
Bonds retake leadership along with real estate. The ten year treasury yield is down over 27% year to date.
It pays to stay diversified and not chase prior winners!
Many investors take the wrong approach looking primarily at recent return.
Overall risk measures and managing downside risk play an increasing role in end results.
Investors instead should be focused on managing Dynamic Beta exposure, evaluation of Active Share, Sharpe ratios, Treynor ratios, Sortino ratios and Alpha.
The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. Decisions on making any investment should be made only subsequent to a thorough professional analysis of the overall individual financial picture and the goal for the investments.
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You can also follow updates at: www.marrswealthmanagement.blogspot.com
The above is for informational purposes only and not an offer or recommendation to buy or sell. Past performance is no guarantee of future return. All decisions about investments should be made within parameters of risk, time frame, financial position and overall asset allocation.