The World Is 3-D

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Post-Modern Asset Allocation in the New Order of the World (NOW)!

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  • There’s a related complication that combines a bit of narrow framing with information overload.
    Here’s a textbook example of tunnel vision, with a focus on the one asset class that people thought couldn’t be beat.
    In the late 1990s, technology stocks soared and we heard from everyone around us that technology was it.
    The news media saturated us with it. Look at this headline—GetRich.Com. That about sums it up, doesn’t it.
    It seemed the only things people wanted to own were technology and telecom…
    …Of course, we know how that cycle turned out.
    The way information is presented really matters. Its frequency, authority, and repetition has enormous implications. And it can make us obsessive, and it can make us forget all about our portfolio construction rules.
  • Let’s start with the facts.
    This slide shows that the average investors in stock funds and bond funds have done pretty poorly over the last 20 years, a time when both stocks and bonds each experienced periods of historically high returns. More specifically:
    The average stock-fund investor earned an annualized return of 3.9%, dramatically below the 11.9% return for the broad stock market.
    The average stock-fund investor’s return was less than half the 9.7% generated annually by the broad bond market, and only a bit more than the 3.0% average annual inflation rate.
    The average bond-fund investor did even worse. His 1.8% average annual return was a bit less than half the average stock-fund investor’s 3.9%, meaning that it also underperformed the broad stock market, the broad bond market, and inflation.
  • The World Is 3-D

    1. 1. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC.
    2. 2. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC. WORLD VIEWS OF INVESTMENT MANAGEMENT 2 The World is Flat Prudent Man Rule The World is Round MPT and 60/40 Allocation
    3. 3. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC. MODERN PORTFOLIO THEORY 3 Traditional 60/40 Allocation A popular 1986 study found that the policy mix or asset allocation explained 93.6% of the portfolio variation. Most advisors built their advisor practice around the study. MPT (Modern Portfolio Theory) was developed in the 1950’s. The emphasis is on diversification, combining different non-correlating asset classes and assets are mixed for the best risk and return trade-off. MPT - Harry Markowitz won a Nobel Prize for its acceptance Asset Allocation - Brinson, Singer Bebower Study 1986
    4. 4. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC. PROBLEM 1: RECENT INVESTOR EXPERIENCE -50% -56% +100% +80% Secular Bear Market Example 1999 - Present A static 60% Asset Allocation to Stocks is Hard to Maintain and has NOT Provided Success to Investors Why have the Same allocation to Stocks when the PE ratio is 20X versus 12X? 4
    5. 5. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC. Internet Bubble Cumulative returns of Russell 1000 from January 1, 1995 Growth Stocks THE PAST HAS NOT FAVORED LONG ONLY, INDEX BASED INVESTING And Bust PROBLEM 1: RECENT INVESTOR EXPERIENCE 0 50 100 150 200 250 300 350 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 5
    6. 6. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC. Loss Aversion Keeps People Invested For Their Long Term Goals Loss Gain Pleasure Pain Small Pleasure Big Pain People React Emotionally to Losses Twice as Much as they do to Gains PROBLEM 2: HUMAN BEHAVIOR We are wired to think differently about gains and losses Source: Amos Tversky and Daniel Kahneman, 1992 – Nobel Prize Awarded in 2002 6
    7. 7. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC. 11.9% 3.0% 3.9% 9.7% 1.8% Barclays U.S. Aggregate Bond Index Average bond-fund investor Investors have under-performed benchmarks Index returns are not investor returns as timing and emotion play a large part Average stock-fund investor InflationS&P 500 Source: DALBAR Annualized Returns 1986–2005 PROBLEM 2: HUMAN BEHAVIOR 7
    8. 8. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC.8 0.50 0.92 0.83 Correlation to S&P 500 High correlation 1.0 GSCI Commodity Index Source: International Traders Research Data thru 2009 3 Year Correlation 0.09 0.53 0.72 20 Year Correlation PROBLEM 3: INVESTMENTS ARE BECOMING MORE CONNECTED A Better Balance is Needed EAFE – International Stocks Real Estate Investment Trusts No correlation 0.0 8
    9. 9. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC.   Most of the portfolio movement is not caused by asset allocation but by the market movement itself. In the Ibbotson analysis, upwards of three quarters (75%) of a fund’s variation is caused by market movements. If we know now that both the friend and enemy to investing is market movements, then that is where we should be focusing our efforts and energy. Solution – Become More Flexible with Asset Allocation. Hire managers that demonstrate ability to move between sectors within their discipline.   "The time has come for folklore to be replaced with reality“ Roger G. Ibbotson Source of Study: The Importance of Asset Allocation,  Roger G. Ibbotson, Financial Analysts Journal, Volume  66, Number 2 9
    10. 10. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC. Source: Yale Endowment, 2007 Where can I find non-correlating investments? MODERN ASSET ALLOCATION So what is an investor to do? Institutional Investors have fared MUCH better during the recent Bear Market 10
    11. 11. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC. The World is Not Flat It is Not Round The post-modern asset allocation is one third each: one third long-only stock, one third long-only bond and one third flexible (absolute return, long-short, commodity and alternatives) Source: John Mauldin 11
    12. 12. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC. ASSET ALLOCATION IN THE NEW ORDER OF THE WORLD American Independence Product Offerings One Third: Long-Short, Flexible, Non-Traditional Strategies One Third: Long-Only Equity One Third: Long-Only Fixed Income American Independence Total Return Fixed Income American Independence Large – Cap Value Large – Cap Growth Target Date “Nest Egg” American Independence Bull/Bear Fixed Income, Fusion Fund, TIPS Fund 12
    13. 13. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC. HOW CAN WE HELP YOU AND YOUR PRACTICE?  Experienced Investment Teams and Firm Management  Active Management Return Oriented in both Fixed Income and Equity  Consistent Alpha Production in Key Asset Classes  Transparent, High Quality and Liquid Portfolios  Traditional Core and Non-traditional programs What are the Largest Questions in Investment Management Today? Where are Interest Rates Going? Inflation / Deflation How Do I Analyze and Value Financial Stocks? American Independence has solutions to these questions! 13
    14. 14. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC. AMERICAN INDEPENDENCE • Assets under management are approximately $1 billion • American Independence Fund family is currently comprised of 15 funds featuring the Stock Fund: Morningstar’s July 11, 2010, “Large Cap Funds on Winning Streaks”, lists the Stock Fund as one of 9 funds that have beaten the S&P 500 Index in successive years since 2005. First in its Morningstar category for 3 year performance (1241 managers), second for 5 year (1153 managers) and first for ten year (839 managers) as of July, 2010 • Nest-Egg Target Date Funds and Traditional Core Disciplines • Alternative Fixed Income and Equity Strategies • AIFS has a strong SMA business featuring the Total Return Bond, Absolute Return Bull/Bear tactical fixed income strategies, Value and Growth portfolios. 14
    15. 15. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC. THANK YOU FOR YOUR INTEREST IN AMERICAN INDEPENDENCE 15 PEOPLE PHILOSOPHY PROCESS PEOPLEPERFORMANCE Contact: American Independence Financial Services 335 Madison Avenue, Mezzanine New York, NY 10017 Direct: 646.747-3477 Toll-Free: 800.985.8984 www.americanifs.com
    16. 16. FOR INVESTMENT PROFESSIONAL USE ONLY. NOT TO BE USED WITH THE GENERAL PUBLIC. 16

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