Smart Beta vs. Intelligent Diversification

Click here for Intelligent Diversification – Periodic Table

Smart Beta is receiving a lot of media attention and asset flow these days. But what about “Intelligent Diversification”?

If smart beta strategies are alternatives to market-cap weightings, then what do you call strategies that seek to maintain diversification benefits when correlations are rising…”Intelligent Diversification”?

As the BlackRock article below points out, diversification is difficult when correlations are rising. This is especially true for non-core exposures as advisors are sold them under the notion that they have a low correlation to core exposures.

The problem is that every asset class has changing correlations, including alternatives. In fast markets (or crisis periods) correlations often move towards one, and diversification can disappear. At IronGate we believe diversification is a good first line of defense, but it has its limits, and balance the need to be tactical by aggressively raising cash.

Now that the 30 year bond bull market has been officially pronounced dead, advisors need to be more vigilant about managing portfolio risk. Gone are the days when an advisor can simply add core fixed income to a US equity portfolio and maintain diversification (as the BlackRock article clearly points out).

As advisors add more complex alternative strategies to their clients’ portfolios, it is even more important to measure the portfolios’ effectiveness in maintaining diversification. For many advisors, it would be more effective to have a single solution to serve as a core-diversifier so they can focus on serving their clients and growing their business.

To learn more, click: http://www.ManagedVolatility.com

Diversification is Difficult When Correlations are Rising: Alternative Investments Education Center: Tools: Financial Professionals: BlackRock

www2.blackrock.com

Rob Arnott’s compelling case for GTAA in 2014 & beyond

Thank you Rob, for making such a compelling argument for GTAA (Global Tactical Asset Allocation) strategies. Research Affiliates has an interesting solution, but there are others investors should consider as a supplement and for strategy diversification.

The Risk Managed Core Diversifier (RMCD) strategy index is one alternative to Mr. Arnott’s Pimco offering. RMCD is a unique “outcome-oriented solution” that aims to solve two investment problems:

1) Non-core exposures can underperform core exposures significantly in the short and medium term (i.e. 2006, 2008, 2012, & 2013).

2) Diversification can disappear when needed the most. In 2008-2009, emerging market equities, REITs, and commodities all lost more than 60%, exacerbating large core equity market losses during the same period.

For more info, visit: http://www.ManagedVolatility.com

Rob Arnott: Q4 2013 Quarterly Update (brainshark.com)

MULTIMEDIA: The past year was an interesting one for investors: Mainstream developed-market stocks did well, while all other asset classes were shunned.  Where are the opportunities today?

Who Should Investors Believe? (Part 2)

(See Part 1) After a 30% move in US equities in 2013, and a powerful move off the March 2009 lows (Nasdaq +221%; S&P 500 +164%) investors are confused by today’s markets, the headlines, as they fear another major correction.

Long term bull markets are born after major corrections, a bottoming phase, and with a lot of uncertainty. The high levels of cash on the sidelines and the uncertainty of bonds in a rising interest rate environment can be the fuel that equities and other risk assets need to continue their march higher.

Unfortunately, behavioral finance and predictive models are prone to mistakes especially as the markets climb a wall of worry. What makes today’s environment different than 1982 (the last birth of a longterm bull market) is the level of interest rates. From 1982-2000, falling rates provided a tail wind for bond and equity investors. Additionally, portfolio managers enjoyed rising bond prices for the part of the portfolio that they counted on to diversification.

Today, with interest rates near zero, bonds no longer have a tail wind. In fact they provide a head wind, causing choppy waters, and increased volatility in bonds. Although bonds can still be a good diversifier to an equity portfolio when equity volatility strikes, investors need to look for “bond alternatives” for income AND for growth.

For more info visit, http://www.ManagedVolatility.com

Historic bull market only in ‘middle innings’: JPM (CNBC.com)                      There are many reasons the stock market could advance double-digits again in 2014 and in years to come, JPMorgan Chief U.S. Equity Strategist Tom Lee told CNBC on Wednesday, a day after the Dow Jones Industrial Average and S&P 500 Index each…

Who Should Investors Believe? (Part 1)

After a 30% move in US equities in 2013, and a powerful move off the March 2009 lows (Nasdaq +221%; S&P 500 +164%) investors are confused by today’s markets, the headlines, as they fear another major correction.

With commencement of the Fed taper the markets will need to stand on its own fundamentals. Even leading economists (Summers, Krugman) warn of being trapped by “secular stagnation”, which causes many professional and individual investors to question if the run on equities can continue…as a result many are under weight risk assets.

Emotional investing, and predictive investment models are prone to mistakes. Whether its behavioral finance or faulty forecasts the only way to capture market returns is a strategic asset allocation that exposes the investor to maximum drawdowns of the asset classes. The lesson learned from the last 13 years is that the benefits of diversification can disappear during fast markets as correlations rise and even quality assets fall.

“Smart diversification” recognizes that diversification is a good first line of defense to managing volatility, but also balances the need to be tactical as a second line of defense to a portfolio. Successfully executing a smart diversification strategy requires a reactive investment process, instead of a predictive process, as markets can remain irrational longer than investors can remain solvent.

To learn more visit, http://www.ManagedVolatility.com

US economy may be stuck in a slow lane for long run (CNBC.com)

Tim Boyle | Bloomberg | Getty Image Job seekers fill out applications at a job fair for concession employment opportunities in International terminal at O’Hare International Airport…

Why Tactical – 60/40 in a Rising Rate Environment

A very useful 1-Pager, that puts the last extended rising rate environment into perspective…and makes a compelling argument for being tactical.

Why Tactical – 60/40 in a Rising Rate Environment managedvolatility.com

The 60/40 portfolio has served investors well over the last 30 years — but how will it serve investors if interest rates begin to rise for decades on end?

Prosper in a Deleveraging World

In the video below IMF Managing Director Christine Lagarde does an excellent job of laying a framework to “reset” the global financial system. The unbalance growth of the world economy is creating simultaneous inflationary and deflationary pressures that need to be balanced to achieve a “beautiful deleveraging.” 

Six years post crisis, the efforts of the world’s central banks to reflate their individual economies has unbalanced growth, but it has at least stabilized. Now more than ever nations need to coordinate their efforts as the Fed continues to taper its monetary easing. The ripple effect of the tapering has required global financial markets to begin to stand on their own fundamentals. Unfortunately, the process of moving from unprecedented central bank intervention to sound global economic growth will take years more, and will include periods of extreme volatility across asset classes.

If world history can serve as a guide, deleveraging cycles can take decades to unwind. Prospering through the current cycle will require additional risk management techniques. Two of the most cost effective techniques are diversification and Dynamic Risk Balancing. Since the benefits of diversification can disappear when need the most, tail-risk management is also important.

To learn more, read the white paper: “Prosper in a Deleveraging World: Using Managed Volatility Strategies”

VIDEO: Lagarde Sees Complacency Risk as Growth Unbalanced  bloomberg.com

International Monetary Fund Managing Director Christine Lagarde talks about the outlook for the global economy. She speaks with Bloomberg Television’s Francine Lacqua at the World Economic Forum’s annual meeting in Davos, Switzerland. (Source: Bloomberg)

WebEx Replay (Part 2) – Managed Volatility: Under the Hood

Click here to watch the WebEx replay:

“Looking Under the hood of the Risk Managed Core Diversifier Index” 
Special Guest, Corey Hoffstein – CIO Newfound Research 

The decision engine is ‘Powered by Newfound’ 
Who is Newfound Research? 

Understanding what to own & how much to own using: 
Absolute Exposure Model 
Relative Exposure Model 

Who should attend: 
RIAs, Family Offices, CIOs, Institutions, Insurance Companies, Pensions, Endowments, Consultants, Financial Advisors 

Host: Michael Boggio / Corey Hoffstein 
Sponsor: IronGate Investment Management 
Duration: 40 minutes 

FOR MORE INFORMATION, VISIT OUR WEBSITE: http://www.ManagedVolatility.com