Q1 2018 AIAR Vol. 7 Issue 1

Fundamental (discretionary) portfolio managers typically build their portfolios from the bottom up. That is, they identify stocks they expect to beat the market and combine them to create a portfolio. However, fundamental managers can leverage quantitative tools to help identify and lessen potential issues in their portfolio, while still maintaining their investment views and goals. In this paper, we’ll use a “real world” portfolio to illustrate how quantitative tools can improve a portfolio’s realized returns.

This paper begins with the Ouroboros, which is a metaphor for the financial alchemy driving the modern Bear Market in Fear. Volatility across asset classes is at multi-generational lows. A dangerous feedback loop now exists between ultra-low interest rates, debt expansion, asset volatility, and financial engineering that allocates risk based on that volatility. In this self-reflexive loop, volatility can reinforce itself both lower and higher. In a market where stocks and bonds are both overvalued, financial alchemy is the only way to feed our global hunger for yield, until it kills the very system it is nourishing.

This paper explores opportunities for enhancing returns using tactical asset allocation and market timing, as well as the challenges posed by market timing, including higher costs and the risk of missing the best-performing days of the market. It examines whether investors can succeed using tactical asset allocation and market timing strategies and look to behavioral finance concepts to explain why investors continue to embrace market timing in their investment process.

Target-date funds are becoming the most critical pool of assets for meeting the retirement needs of America’s workers. But we fear that many of the current funds are managed as relics of the past and don’t incorporate today’s best practices and solutions. To better equip America’s workers for the financial needs of retirement, we have researched and developed an improved glide path design—incorporating a broader set of asset classes with a multi-manager architecture that can potentially reduce risk and build more retirement income.

This paper takes a close look at the performance differences between the Endowment Model and Public Pensions across various cycles. The lucrative illiquidity premium has generated superior returns for U.S. endowments versus U.S. public pensions, mainly during the 1990s internet bubble, and until the 2008 financial crisis. Smaller investors struggle to run an endowment portfolio, proof that a one size strategy does not fit all investors. Thus, the possible alternative option could be a well-designed index fund strategy that focuses on superior risk-adjusted returns and doesn’t have the same pitfalls that the endowment model inherently has.