Long/short portfolios are helpful tools for quantifying the value-add of portfolio changes, especially for active strategies. In the context of fees, we can isolate the implicit fee of the manager’s active decisions (active share) relative to a benchmark and ask ourselves whether we think that

The world is awash with new data. Satellite imagery, shipping manifests, agricultural sensors, and more can provide untapped insights. To understand how investors might benefit, we decompose investment strategies into three pieces: systematic rules, idiosyncratic decisions, and randomness. We

For active strategies, investors often focus on the potential outperformance the strategy can create. Beyond the potential for outperformance, active strategies also introduce tracking error: extra volatility that comes from active decisions. While most view tracking error as a negative, if derived

Determining the allocations of an investment strategy is often the first step in scenario analysis, sensitivity analysis, and stress testing. For a single fund or ETF, the allocations can be found on the provider’s website or in marketing materials. However, when analyzing a larger group of funds

We’re often asked, “is now a good time to implement tactical strategies?” We believe there are better and worse periods for tactical, largely based upon expected risk/reward trade-offs and available diversification opportunities. For investors, we believe an equally important consideration is

In an ideal world, all investors would outperform their benchmarks. In reality, outperformance is a zero-sum game: for one investor to outperform, another must underperform. If achieving outperformance with a certain strategy is perceived as being “easy,” enough investors will pursue that

The current return expectations for core U.S. equities and bonds paint a grim picture for the success of the 4% rule in retirement portfolios. While varying the allocation to equities throughout the retirement horizon can provide better results, employing tactical strategies to systematically

Averages are often used to summarize data: but sometimes fitting for the average means fitting nothing at all. Expected returns are a meaningful input to portfolio construction, but are unlikely to be the returns actually realized. Reality rarely looks average. The world is dynamic and forecasts can

In a world of anemic asset returns, tax management may help significantly contribute to improving portfolio returns. Ideally, asset location decisions would be made with full investor information, including goals, risk tolerances, tax rates, and distribution of wealth among account types. Without

Summary The low current market outlook for stocks and bonds paints a gloomy picture for retirees under common retirement forecasting assumptions. However, assumptions such as net investment returns and retirement spending can have a large impact on forecasted retirement success, even for small

Summary­­ The current outlook for stocks, bonds, and traditionally allocated portfolios is near all-time historical low levels. Even though short-term performance may vary, investors looking for long-term success may have to expand their investment palette to earn returns anywhere close to those

Under a simple model of asset prices, expected returns and volatilities can be used to calculate expected maximum drawdowns over a given timeframe. However, these expected drawdowns do not line up with the drawdowns investors have experienced. Simple models have underestimated drawdown risk in

While valuation-based market timing is notoriously difficult, present and future retirees should prepare for muted U.S. stock and bond returns relative to historical experience. High valuations suggest that retirement withdrawal rates that were once safe may now deliver success rates that are no

Two questions we frequently receive are: “what is global tactical asset allocation?” and “what are style premia (factors)?” In this commentary, we aim to provide a very high-level answer to those questions, incorporating as little math or financial theory as possible and avoiding nuanced

Calculating an optimal portfolio from a set of capital market assumptions (CMAs) is a straightforward quantitative exercise, but the results are highly dependent on the assumptions holding in the future. Any portfolio that is initially assumed to be optimal will be sub-optimal if any single assumed

In last week’s commentary, we outline a number of problems faced by tactical asset allocators in actually implementing their views. This week, we explore popular methods for translating a combination of strategic views and tactical views into a single, comprehensive set of views that can be used

Newfound specializes in systematic, factor-based approaches to constructing tactical portfolios. While we believe factors like value, momentum, carry, and trend are applicable at the asset class level, care must be taken in designing tactical allocation portfolios. We outline four considerations

Traditional portfolio management focuses explicitly on the trade-off between risk and return. Anecdotally, investors often care more about the growth of their wealth. Due to compounding effects, wealth is a convex function of realized returns. Within, we explore geometric mean maximization, an

In a rising rate environment, conventional wisdom says to shorten duration in bond portfolios. Even as rates rise in general, the influence of central banks and expectations for inflation can create short term movements in the yield curve that can be exploited using systematic style premia. Value,

The term “multi-asset” appears in many investment strategies and applies to both balanced funds and target date retirement funds. However, multi-asset strategies may be concentrated in a limited set of asset classes, and the performance of these asset classes may be driven by an even more

In asset management research, we often assume an investor has an infinite horizon, no spending requirements, and no tax consequences. While this may be appropriate for some institutions, it is rarely appropriate for individual investors, leaving financial advisors to fill the gaps. Many factor

Factors such as value, size, and momentum are generally constructed using dollar-neutral portfolios in academic literature. The market beta exposure in these portfolios is often significant and can vary substantially over time. Each factor has gone through periods where these features have been

Limited attention drives us to focus on the big details of investment strategies. Small details can have an outsized impact on performance, especially if they can compound upon one another. To quote Aaron Brown, Head of Risk at AQR: “It takes a lot of compounding to turn a mistake into a disaster.

Momentum-based sector rotation is a popular investment strategy. Recent academic studies have shown that alternative implementations of standard momentum – including risk-adjusted momentum, residual momentum, and “frog-in-the-pan” momentum – can significantly improve the risk-adjusted and

In this case study, we explore building a simple, low cost, systematic municipal bond portfolio. The portfolio is built using the low volatility, momentum, value, and carry factors across a set of six municipal bond sectors. It favors sectors with lower volatility, better recent performance, cheaper

Market expectations are a key input in the portfolio construction process. These expectations can be either qualitative or quantitative. How to form expectations for more complex strategies (e.g. managed futures, covered calls, and alternatives) is often less straightforward than forming

Factor investing (value, momentum, low volatility, carry, trend, etc.) is well-known in equities but less discussed in other asset classes. However, many of these factors are just as prevalent in other asset classes, such as bonds, commodities, and currencies. In this case study, we explore the

Quant is a broad word with many job descriptions in finance. In asset management, a quant is someone who applies mathematical (usually statistical) techniques to analyzing the securities market, usually with an eye towards identifying investment opportunities. Quants rely on factors: systematic

Research Affiliates published a new piece of research exploring mutual fund returns over the last 25 years and the implied ability for managers to capture popular factor premiums published by the academic community. They argue that several factors accepted in academia may not be implementable after

From 1981 to 2017, 10-year U.S. Treasury rates declined from north of 15% to below 2%. Since bond prices appreciate when rates decline, many have pointed towards this secular decline as a tailwind that created an unprecedented bull market in bonds. Exactly how much declining rates contributed,

Before we dive into this week’s commentary, we want to extend a very heartfelt thank you to everyone who nominated us for ETF.com’s 2016 ETF Strategist of the Year Award. The award ceremony was held on Thursday night and we were fortunate enough not to leave empty handed! We’re incredibly

This week's commentary is a long-form presentation all about factor investing and smart beta. We cover four topics. In the first section, we explore the basics of factors: what are they and where do they come from? The second topic explores why implementation details matter and why long-only

The debate rages on over the application of valuation in factor-timing methods. Regardless, diversification remains a prudent recommendation. How to diversify multi-factor portfolios, however, remains up for debate. The ActiveBeta team at Goldman Sachs finds new evidence that composite

Sector rotation is a popular investment strategy whereby managers actively reallocate capital from one investment sector to another based upon changing market conditions. There are many ways to run sector rotation strategy, including: business cycle indicators, macroeconomic indicators, value-based,

Prospect theory states that the pain of losses exceeds the pleasure of equivalent gains. An oft-quoted ratio for this pain-to-pleasure experience is 2-to-1. Evidence suggests a similar emotional experience is true for relative performance when investors compare their performance to common reference

The behavior gap is the difference between the returns on an investment and the returns that an investor realizes in that investment. Behavioral biases ingrained in human nature, such as anchoring, hindsight, and overconfidence drive emotional decisions that can lead to a behavior gap, but

Trend-following strategies – such as managed futures and tactical equity – have historically provided crisis alpha against sustained drawdowns. For short-horizon events (e.g. single day, week, or month events), the effectiveness of these approaches in managing risk is largely based on the luck

Based on our post from earlier today ("Anatomy of a Bull Market"), we received a request to decompose U.S. equity returns over rolling 10-year periods. The graph presenting this data is below. To perform these calculations, we calculate the annualized return generated by each source

Long-term average stock returns smooth over the bull and bear markets that investors experience, and no two market cycles ever unfold the exact same way. Bull and bear markets can vary significantly in both duration and magnitude. But there are other characteristics of bull markets that can also

Diversification is a cornerstone of portfolio construction. It provides investors with the important ability to invest in the face of uncertainty. Because it can reduce risk without necessarily sacrificing potential reward, it is known as the only free lunch on Wall Street. Yet, we believe that many

Cliff Asness, Antti Ilmanen, and Thomas Maloney of AQR are out with a new paper about market timing with value, titled: Market Timing: Sin a Little. Specifically, the paper explores whether the Shiller PE (also known as the cyclically adjusted P/E, or CAPE) can be effectively used to directionally

Modern portfolio theory provides a way for investors to identify the efficient frontier: the set of portfolios that maximize return per unit of risk. Taken to its logical conclusion, modern portfolio theory states that all investors should invest in the same global market portfolio and increase or

Position sizing is often the result of portfolio construction and is therefore largely overlooked in manager selection. Risks introduced by active strategies can change not only the absolute risk level of the portfolio, but also the relative composition of risk. Active risk can also create tracking

Last week’s commentary highlighted why we believe traditionally built portfolios may face return headwinds going forward. Traditionally built stock/bond allocations also exhibit extremely high risk concentrations. Non-traditional exposures, now available as low-cost ETFs, can help introduce

Happy New Year! To kick off the year, we want to share a white paper we penned mid-December containing our views on building a modern strategic asset allocation. The white paper covers: Why we believe tailwinds from the last 30 years are turning into headwinds for traditionally allocated stock-bond

On behalf of the entire Newfound Research team, we would like to wish you and yours a happy holiday season. We treat this weekly research commentary as a sacred part of our investment process. We continue to be honored and humbled by the vast and growing number of readers it reaches, a sign of the

With significant research into factor rotation in 2016, we expect to see more factor rotation strategies in the market in 2017. Using six popular factors (Value, Size, Reinvestment, Operating Profitability, Momentum and Beta), we explore both switching and rotation based strategies. We find

Summary­­ Economic growth is a key driver of long-term stock and bond returns. Economic growth comes from two main sources: demographic changes (i.e. increases in the number of workers) and productivity growth (i.e. each worker producing more output). Historically, approximately 55% of growth has

Summary In a persistent, low interest rate environment, dividend strategies have rapidly increased in popularity. In theory, investors should be indifferent to dividends. In practice, they are not. As a strategy, a focus on high dividend yield may simply be a (poor) value strategy in drag. A focus

With 10-year rates jumping over 40bp in November, investors are beginning to talk about rising rates again. While rising rates may cause short-term volatility, coupon yield is a much more significant contributor to portfolio return over the long run. Increasing rates actually allow us to reinvest at