The Yale info is from Bespoke.
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11 comments:
Thanks for a great post, Roger. For all the yammering that goes on about the Fed, recessions, housing, etc., etc., etc., your insights into portfolio strategy are practical and helpful. There are lots of lessons to be drawn from the Bespoke table in terms of relative asset allocation and trends over the past few years.
Roger:
Many thanks for the wonderful video.
Stranger.
Really enjoyed the post today. Sanity matters.
T
Impressed by your gradual warming toward asset allocation models, I post this clip concerning Mebane Faber's widely read research report that should prove helpful to your readers.
"This month we visit with Mebane Faber, who
promotes a related strategy for capitalizing
on market volatility—albeit one that takes a
more aggressive tone on allocations. The portfolio manager
of Los Angeles-based Cambria Investment Management, Faber
says there are benefits to using market-momentum signals for
switching between all cash and long positions for each asset
class in a diversified portfolio. The main attribute is sharply
lowering risk, while maintaining a comparable level of return
relative to simply buying and holding the same assets.
The risk reduction flows from a rules-based strategy for an
equal-weighted mix of five major asset classes, Faber explains.
The tactical asset allocation model for a given asset class is one
of moving from a 100 percent weighting to all cash when— based
on month-end closing prices—the relevant index closes below its
trailing 10-month moving average. When the month-end index
closes above its moving average, the allocation for the asset class
swings back to 100 percent investment.
Simple but effective, argues Faber, who previously
worked as a quantitative analyst at a futures
broker/dealer and before that, as an equity
analyst at the Genomics Fund. He adds that the
strategy, when used for building a portfolio of
multiple, long-only betas, shares more than a
passing resemblance to a hedge fund of funds—
less the high fees, liquidity issues, etc.
Faber detailed his findings in a paper published
in the Spring 2007 issue of The Journal of
Wealth Management (“A Quantitative Approach
to Tactical Asset Allocation”). The paper’s basic
conclusion may or may not persuade, but it’s
still worth a read for its perspective on the relationships
between risk management, market momentum and
rebalancing/market timing in a multi-asset class context.
As for Faber’s motivation for undertaking the study, his inquiry
is only partly academic. He is managing director as well as portfolio
manager of the recently launched asset management arm
of the boutique investment bank Cambria Capital. As you might
expect, the portfolio strategy for Cambria Investment Management’s
high-net-worth clients is informed by Faber’s research."
His model uses five or six asset classes equally divided to keep it simple.
Long only approach when the closing monthly price crosses above the 10 SMA.
Total avg returns including dividends is an impressive 11.5% since 1972, with St Dev of 6.5%, Max Drw Dwn of 10%. The S&P for the same period had much much worse stats. Faber's simulated stats are equivalent to the S&P Buy and Hold returns without the Ulcers of maximum 20% or more drawdowns. It fails to achieve the Yale and Harvard avg returns of 18% largely because of having no Private Equity class in his simulation model.
Currently he is developing just such a fund that should be available sometime this summer. He can be reached at
MF@cambriainvestments.com
Read his Report. Very encouraging for us simple-minded folks using ETFs and CEFs.
My kid's UTMA accounts are setup generally around the Swenson model. I think there are a couple of points that you might consider;
1. 27% in Real Assets is likely due to growth in holdings. I doubt Swensen would target that large of an amount in a new account.
2. What differentiates a Real Asset from some of the other classes is largely up to the individual. For instance, I used to hold a foreign manager of regional airports under the Real Assets category, but have recently moved it to the Foreign Equity class.
3. It's the Asset Classes, not the percentages! Swenson's (and Mebane, and Roger) contribution to the small investor is the idea of different Asset Classes. My kid's UTMA accounts are only 6 months old, but they are down 3.5% versus 9% for the market (VTI or EFA, take your pick - heh). And half of that decline is commisions. Will the accounts heavily lag an uptrend? In their current form, yes. But they are only 6 months old, so they are still 20% cash.
Wah (get it Roy, Wah?)
I may have to not so fast my friend you on point number 1.
It's a good bet that if a segment grew too big for whatever they have in mind they would pair it back.
I think real assets is so high because it includes REITs, recall that in Swensen's suggested ETF portfolio he goes 20% REITs.
I agree - 27% in real assets (even if they include REITs) seems very high. I would like to see how similar allocations would have performed over other periods.
Btw I posted my model updates (www.regimenia.com) and pessimism does seem to be burning off. Also, I posted about a possible top in the Basic Materials sector. Curious as to what you might think.
Hi Roger.. thanks for the inputs.
A couple of [stupid] questions from me..
1.What is meant by absolute return..
2.By real assets does it mean Real estate or commodities?
3. And finally portfolio styles and preferences vary but I am surprised to see very low % in cash and fixed income, when common sense begs to differ.
Sorry to make your blog a Q&A session but I am confused.. :(
rackgen,
1) Absolute return could mean something like trying to always get the same percent return every year regardless of what the market is doing, like maybe 7% or something. another application might be to always get 3% above inflation. There are others.
2) I think their definition of real assets includes both RE and commodities I also think it might include TIPS or the like.
3) The time horizon for them is infinite so not a lot of cash and as far as bonds at less than 4% for ten year treasuries it is an expensive asset class so maybe that's why.
Faber's in and out of asset class based on 10 month trailing moving average is easy to understand when you look at SPX over long time with 200 days(equivalent to 10 month) moving average. Look at that moving average line, if you can let your $ only in when the line goes up and out when the line goes down, how couldn't you beat S&P. The trick is to filter out those flicking around the trendline
Another way to get private equity exposure is through a vehicle like Conversus Capital (CCAP). It's similar to a closed end fund in that it publishes an NAV, and the shares trade at a premium or discount.
Conversus actually holds limited partner interests in a bunch of private equity and venture capital funds. A share in those LP interests is what you are buying.
The downside is it trades on Euronext, and is somewhat difficult to access, but it can be done.
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