Booms, Busts,Thieves,
Crooks and Idiots, OH
MY!!
Bob Klosterman
Investment Selection
Inflation
Sea Of Sameness
Volatility
Global Dislocations
Finding the Right Tools
Top Line Portfolio Decisions
Strategy
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etu
Diversifiers
te R
olu
Core
Abs
Five Magic Questions
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What do I know…and not know?
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Is average okay?
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Do I have the energy, skills and discipline?
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Should I focus or diversify
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What is more important? Costs or results?
The Great Debate
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Active Versus Passive
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Passive
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80% of Managers Have under-performed (Surprised?)
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Lower Costs
Active
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Pareto Principle
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20% Still Leaves Adequate Opportunities
Core/Traditional Screening
Active Screening
Use Active or Passive Managers
Exhibit Strong 3,5, and 10 year Risk Adj. Returns
Deliver Upper Quartile Performance Net After Fees
Global Allocation with Valuation Driven
Over and Under Weights
Monthly Screenings of Over 30,000 Managers
Manager Tenure and Style Consistency
Up Capture- Down Capture
Costs
6 Risk Adjusted Tools
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Alpha
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Beta
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R-Squared
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Sharpe Ratio
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Treynor Ratio
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Sortino Ratio
Beta
Beta is a measure of the volatility, or systematic risk,
of a security or a portfolio in comparison to the
market as a whole. Beta is used in the capital asset
pricing model (CAPM), a model that calculates the
expected return of an asset based on its beta and
expected market returns.
Also known as "beta coefficient."
From Investopedia
Alpha
1. A measure of performance on a risk-adjusted basis.
Alpha, often considered the active return on an investment, gauges the
performance of an investment against a market index used as a benchmark, since
they are often considered to represent the market’s movement as a whole. The
excess returns of a fund relative to the return of a benchmark index is the fund's
alpha.
Alpha is most often used for mutual funds and other similar investment types. It
is often represented as a single number (like 3 or -5), but this refers to a
percentage measuring how the portfolio or fund performed compared to the
benchmark index (i.e. 3% better or 5% worse).
Alpha is often used with beta, which measures volatility or risk, and is also often
referred to as “excess return” or “abnormal rate of return.”
2. The abnormal rate of return on a security or portfolio in excess of what would
be predicted by an equilibrium model like the capital asset pricing model (CAPM).
In this context, alpha is often known as the “Jensen index.”
From Investopedia
R-Squared
A statistical measure that represents the percentage
of a fund or security's movements that can be
explained by movements in a benchmark index. For
fixed-income securities, the benchmark is the T-bill.
For equities, the benchmark is the S&P 500.
From Investopedia
Sharpe Ratio
The Sharpe Ratio is a measure for calculating risk-adjusted return, and
this ratio has become the industry standard for such calculations. It
was developed by Nobel laureate William F. Sharpe. The Sharpe ratio is
the average return earned in excess of the risk-free rate per unit of
volatility or total risk. Subtracting the risk-free rate from the mean
return, the performance associated with risk-taking activities can be
isolated. One intuition of this calculation is that a portfolio engaging in
“zero risk” investment, such as the purchase of U.S. Treasury bills (for
which the expected return is the risk-free rate), has a Sharpe ratio of
exactly zero. Generally, the greater the value of the Sharpe ratio, the
more attractive the risk-adjusted return.
From Investopedia
Treynor Ratio
A ratio developed by Jack Treynor that measures returns earned
in excess of that which could have been earned on a risk-less
investment per each unit of market risk.
The Treynor ratio is calculated as:
(Average Return of the Portfolio - Average Return of the RiskFree Rate) / Beta of the Portfolio
From Investopedia
Sortino Ratio
A modification of the Sharpe ratio that differentiates harmful volatility from
general volatility by taking into account the standard deviation of negative
asset returns, called downside deviation. The Sortino ratio subtracts the
risk-free rate of return from the portfolio’s return, and then divides that by
the downside deviation. A large Sortino ratio indicates there is a low
probability of a large loss. It is calcullted as follows:
From Investopedia
Other Criteria
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Style Consistency
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Manager Tenure
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Active Share
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Costs
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Risk Adjusted Returns
Diversifier Screening
Bias Towards Liquid Funds
Evidence of Skill and Methodology
Persistent Low Correlation to Core Allocation
Including Screening Process from Core
Sound 5 Year History
Absolute Return Screening
Bias Toward Illiquid Funds for Illiquidity Premium
Evidence of Skill and Methodology
Low Correlation to Core Allocation
Demonstrated High Current Yield
Extensive Due Diligence
Sound Business Premise
Sound Operations and History
PCAOB Audits
Asymmetrical Risk Return Profile
Low Volatility
Wrapper Watch
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Packaging is key in marketing financial products
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Seek to understand what is behind the “wrapper”
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Premium/Discounts to Net Asset Value
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Additional fee layers
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Discredited idea with new name
0
Data Source: Ned Davis Research
2/1/2020
3/1/2019
4/1/2018
5/1/2017
6/1/2016
7/1/2015
8/1/2014
9/1/2013
10/1/2012
11/1/2011
12/1/2010
1/1/2010
2/1/2009
3/1/2008
4/1/2007
5/1/2006
6/1/2005
7/1/2004
8/1/2003
9/1/2002
10/1/2001
11/1/2000
12/1/1999
1/1/1999
2/1/1998
3/1/1997
4/1/1996
5/1/1995
6/1/1994
7/1/1993
8/1/1992
9/1/1991
10/1/1990
11/1/1989
12/1/1988
1/1/1988
2/1/1987
3/1/1986
4/1/1985
5/1/1984
6/1/1983
7/1/1982
8/1/1981
Cumula&veNetBuying(BillionsofUSD)
9/30/2015
2,500
2,000
Cumula3veNetBuyingStockMutualFunds(ac3ve)
Cumula3veNetBuyingETFs(passive)
Cumula3veTotalNetBuying
1,500
1,000
500
Assessing Costs
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Compensation Disclosure Often Incomplete
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Often multiple layers of fees
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12(b)1 Fees
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Management Fees
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Advisor Fee
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Fund Costs (Audit,custody etc.)
Annuities often most expensive
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Firm’s Website
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Third Parties (Morningstar, etc.)
Disruptor’s
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Often referred to as “Robo Advisors”
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Look for the “hooks”