A well-designed investment plan is an important part of achieving investment objectives, but even the best investment plan is useless if you cannot stick to it. Rolling relative performance can give context to the size of short-term portfolio fluctuations while looking at risk exposures can give

As an investment strategy, momentum focuses solely on prior returns. Being valuation agnostic, however, does not mean that a momentum strategy does not have first-order valuation effects on portfolio construction. Using historical US sector data, we find that both cross-sectional and time-series

If you want long-term outperformance, you must be able to stomach short-term underperformance. As William Bernstein said, “The most important investment ability is an emotional discipline.” Investing is a team sport that requires this discipline from both the investment manager (to stick to his

The power of strategic asset allocation is best harnessed when future asset class behavior is relatively certain and diversification opportunities abound. Uncertainty around rising rates and the current monetary policy environment may call both of these criteria into question. Holding all else

The benefit of including commodities in individual investor portfolios is often up for debate, focusing on aspects such as expected returns, volatility, access, and diversification. While we think that commodities can add value if the risks are understood, many passive ETFs that offer commodity

The debate for the best way to build a multi-factor portfolio – mixed or integrated – rages on. Last week we explored whether the argument held that integrated portfolios are more capital efficient than mixed portfolios in realized return data for several multi-factor ETFs. This week we explore

The debate for the best way to build a multi-factor portfolio – mixed or integrated – rages on. FTSE Russell published a video supporting their choice of an integrated approach, arguing that by using the same dollar to target multiple factors at once, their portfolio makes more efficient use of

Mean-variance optimization assumes that you can fully describe the risks and returns of assets in a few simple numbers. Extreme market events often cause volatilities and correlations to spike dramatically, but stress testing on an individual asset basis can allow our own biases and oversights to

Many articles expounding upon the risks of ETFs that invest in illiquid assets (high yield bonds, bank loans, emerging markets, etc.) have been published in recent years. While there are additional risks inherent to these ETFs, the ETF structure provides an additional layer of liquidity that is not

When carried through a traditional mean-variance optimization process, J.P. Morgan’s capital market assumptions imply a significant overweight to satellite bonds. Many portfolios have significant capital gains as a result of strong equity and fixed income markets over the last 30+ years. However,

When carried through a traditional mean-variance optimization process, J.P. Morgan’s capital market assumptions imply a significant overweight to satellite bonds. Investors can suffer from behavioral biases – particularly around reference points ­– that can make normative optimal portfolios

It is common for large asset management firms to publish their capital market assumptions: long-term global asset expected return and covariance assumptions. Yet many firms do not draw the link between what published capital market assumptions say and what they mean when carried through the

SUMMARY We have previously discussed many problems associated with the measurement of alpha. Measurement uncertainty, the choice of model risk factors, and the analysis timeframe can all have significant impacts on the calculation and applicability of alpha, and investors are often hard-pressed to

Summary We have noticed the market reaching a broad consensus that equities are overvalued, implying a drag on forward expected returns as valuation multiples contract. While there is often great wisdom in the crowd, there can also be great madness. We believe it is prudent to consider how the crowd

Summary Low volatility equity ETFs have seen huge inflows this year, driven by both a compelling story (risk-managed equity investing) and significant outperformance. Critics have raised concerns that short-term performance chasers have driven up the valuations of these strategies, increasing the

This blog post is available as a PDF here. Summary Over the last year, we’ve written about how low interest rates and high equity valuations point to a low return rates for traditionally allocated portfolios. In a State Street survey of over 400 institutional investors, the expected return rate

Summary As a stand-alone asset class, dividends may make an interesting alternative to fixed income: they offer low volatility, are generally robust to market crises, and may serve as an inflation hedge. Accessing dividend strips was previously restricted to institutional investors, using

I recently came across a graph similar to the following while doing some market research. 1 Source: Yahoo! Finance. Analysis by Newfound Research. Data from January 1951 – December 2015. The argument was that the markets are getting more volatile. While this certainly looks to be the case based on

Well, despite some recent market turmoil from the Brexit, the S&P 500 is still hovering near its high from last year on a price basis. If we include the reinvestment of dividends, then we have already seen new highs in April, May, and June of this year. As we wrote about previously, a bear

Recently a paper was published by AQR where the authors advocate for an integrated approach to multi-factor portfolios, preferring securities that exhibit strong characteristics across all desired factors instead of a mixed approach, where securities are selected based upon extreme exposure to a

Alpha is the holy grail of asset management: risk-free excess returns generated by investment skill. Alpha is one of the most commonly quoted summary statistics – yet measuring alpha is surprisingly difficult. Without an understanding of measurement uncertainty, fit of our model, or even the risk

Summary Most advisors have a fund checklist or screen: a list of selection criteria they employ to help determine whether a fund is worthy of further evaluation. The vast majority of checklists we see employ a performance screen based on a 3- or 5-year period. We believe that employing such a

Summary Many investors look at fixed income as the diversifying sleeve of their portfolio, helping to safeguard capital against losses in more volatile equity positions. Traditional fixed income indices are very heavily weighted towards U.S. Treasuries and agency mortgage-backed securities, offering

Answering whether a strategy should be a core holding or an alternative holding often has less to do with the investment strategy itself and more to do with an investor’s understanding of how that strategy will perform. Asset classes and strategies that investors are comfortable with, and have a

Summary For its ability to reduce risk without necessarily sacrificing potential reward, diversification is known as the only free lunch on Wall Street. Diversification provides investors with the important ability to invest in the face of uncertainty. When viewed for its pieces instead of as a

We recently updated, expanded, and put a new face on a whitepaper we had written last year called, “Why Tactical Fixed Income is Different.” You can access the new paper here. In the original version, we looked at some of the reasons why a simple tactical strategy that commonly works in equities

How effective is your method of managing portfolio risk? We compare and contrast different approaches – including fixed income, managed futures, low volatility equities, and tactical – to explore the relative protection they can deliver versus the return drag they can create.

The math of losses is not a secret: as losses grow, the return required to hit breakeven grows asymmetrically. At losses below -15%, this relationship is nearly linear; at higher levels, the gap grows dramatically. By reducing the “capture ratio” of an investment approach, we can exploit this

This blog post is available for download here. Summary When a manager outperforms, it implies that other investors have underperformed. In understanding an investment process, we believe it is critical to understand the source of this outperformance to determine whether it is sustainable or not. We

In recent conversations with current and potential clients, we have seen an uptick in the use of indexed annuities as a tool for risk management. For the uninitiated, Fidelity succinctly described an indexed annuity in a recent blog post: "An indexed annuity is a contract issued and guaranteed

Summary Many tactically risk-managed strategies use trend following to manage the risk of severe drawdowns, but in sideways markets, like those experienced in 2011 and 2015, trend following ends up lagging the market by buying high and selling low. As with insurance policies or static allocations to

In a commentary a few weeks ago entitled Growth Is Not “Not Value,” we discussed a problem in the index construction industry in which growth and value are often treated as polar opposites. This treatment can lead to unexpected portfolio holdings in growth and value portfolios. Specifically, we

Factors are a way to identify unique alpha sources. Factors often have a “light” and “dark” side. While the light side is expected to outperform the dark side, often the light side also outperforms the market and the dark side underperforms the market. The outperformance and underperformance

Justin and I will be speaking on panels in New York City in May. May 3rd – 3:10pm – Princeton Club in New York I will be sitting on a panel titled Advancements in Asset Allocation at WealthManagement.com's BUILD conference. Here is a quick description of the panel: The level of

Justin and I submitted a paper for the NAAIM Wagner 2016 competition. Unfortunately, it didn't place. The good news is that we can share it with everyone that much earlier! The paper is about trying to time factor premiums using the same behavioral biases that we believe cause them. Here is the

Many asset management decisions are based on the three-year track record. Three-years is suspiciously close to a common rule-of-thumb for calculating statistics, but in this case, it is a misapplication. With many strategies, short-term luck swamps long-term skill. Combining strategies can reduce

Summary Following even the best practices in investing can go against us in the short run. Volatility in short-term performance is necessary for the long run outperformance opportunity to exist. However, the opposite also holds true: a strategy that will underperform over the long run should also go

Justin spoke at the Investing in Smart Beta conference this week in Fort Lauderdale, FL. He spoke alongside Research Affiliates in a session titled "The Smart Beta Checklist: Choosing The Best Strategy & Risk/Return Profile For Your Portfolio." Here's a quick description:

This post is available as a PDF here. Summary Multi-factor portfolios are a great way to diversify across multiple factors that can potentially create excess risk-adjusted returns while simultaneously smoothing out relative performance volatility. There are two ways we've seen manufacturers

A Newfound, we try to embrace March Madness as an opportunity to foster some good-natured competition within the company. This year we decided to mix things up and go with our own version of ReSolve's unique March Madness Challenge. When Corey originally suggested the idea, my initial reaction

The team over at ReSolve recently posted about their very unique March Madness Challenge. The crux of their idea is that the rules governing a more traditional bracket system is fundamentally flawed since it inherently reduces the sample size upon which skill is measured. For example, nearly

Summary The "rules of the game” are crucial in investing. Specifically, care should be taken to ensure that the rules used in portfolio construction align with client expectations. Anecdotally, we see two situations where these rules differ. First, performance is often evaluated over time

Fees are always a prominent topic in ETF selection, but they are not the only cost associated with the product. Even with seemingly similar passive ETFs, different index construction methodologies can lead to widely varying performance. Taking a holistic view that incorporates both the investment

Summary Style boxes give us the impression that "growth" and "value" sit at opposite ends of the spectrum. In reality, whether a company is growing or shrinking ("growth") is independent of whether a security is cheap or expensive ("value"). To align with the

Investors often focus their analysis on benefits. In the finance industry, we’ve distilled this down to a single metric: alpha. Benefits and risk require separate analysis. Increasing benefits does not necessarily reduce risk or even leave it unchanged. In practice, increasing alpha can actually

In our 2016 Market Outlook (available on our website), we discuss expected real returns for U.S. equities over the next decade. The picture isn't pretty. A bear market may be just what the doctor ordered. U.S. Large-Cap Expected Real Return Forecast Horizon Jack Bogle 2.0% 10 Years Research

Summary Active strategies are often defined by the factor tilts they take on. For factor tilts to continue to out-perform the market over the long-run, they must exhibit premium volatility that causes short-term under-performance. Since alpha is zero-sum, investors that fold during periods of

Summary We’ve heard from several market participants that they feel that markets have “gotten faster” lately. We define two quantitative measures of speed and examine how speed has evolved since the 1920s We demonstrate that market speed is actually well within normal ranges – but perhaps

Our friends at Alpha Architect just wrote a great piece titled "Even God Would Get Fired as an Active Investor." In the study, they show that while an omnipotent investor with perfect foresight would have delivered great returns over the long run, he would be fired many times along the way

As the news cycle spins faster and faster, we are seeing more and more market observations based on gut feelings. One such observation that I have heard recently is that oil and energy are driving stocks more than ever before. I thought we would look to the hard data in our own version of