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--- Model Portfolio Changes We’re dropping commodities from our investment models.
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We are dropping our exposure to commodities as an alternative asset class based on three factors: (1) It has become much more equity-like in its behavior, reducing its ability to hedge equity risks. (2) Costs and liquidity make it less desirable—we never liked its 85 basis-point operating expense. Nor did we like the three-day hold before cash distribution on sell orders. And (3) the expected return profile is significantly below equities because the return potential is tied more to the inflationary environment than equity market fundamentals.
We’re introducing a new tool for reducing volatility and capturing return for all of our portfolios.
New research by Robert Novy-Marx (2012) has identified a way to capture a dimension of expected returns related to profitability. Novy-Marx found that profitability, as measured by gross profits-to-assets, has roughly the same power as book-to-market in predicting the cross section of average returns. While this changes a very basic premise in the Fama/French value model, controlling for profitability dramatically increases the performance of value strategies, especially among the largest, most liquid stocks. And controlling for book-to-market ratios improves the performance of profitability strategies.
Another way of explaining this is that strategies based on profitability are growth strategies that also provide an excellent hedge for value strategies. Adding profitability on top of a value strategy reduces the strategies’ overall volatility. According to Novy-Marx, both profitability and value strategies generally performed well over the sample time periods, but both had significant periods in which they lost money. However, profitability generally performed well in the periods when value performed poorly, and vice versa. As a result, the mixed profitability-value strategy never experienced a losing five-year period (data set July 1963 – December 2010).
Dimensional Funds has aided in this new research and has identified a way to capture a dimension of expected returns related to profitability. Dimensional has made major advances with research in this area and has found a robust proxy that can be applied to portfolio management.
We have stayed in tune with this research and the recent announcements from Dimensional Funds. We’re excited to bring this new key ingredient to our clients and will be incorporating the profitability strategy into our AssetBuilder portfolios.
We will be introducing model portfolios in distribution.
For most of our lives we accumulate assets. But when we retire, our portfolios go into distribution, distributing interest, dividends and assets as needed. Research has shown that we can make our money (and income) last longer by annuitizing a portion of our assets
Annuitized income doesn’t increase the yield of a portfolio. It defines a guaranteed income stream and works to reduce the demand on the remaining portfolio for distributions in the first years of retirement. That, in turn, increases the odds of portfolio survival7. If you need a relatively high annual withdrawal and don’t have a pension, this solution may work for you. We believe this is a better solution for the income problem than reaching for higher yields and taking higher risks.
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Model Portfolio Changes
We’re dropping commodities from our investment models.
...
We are dropping our exposure to commodities as an alternative asset class based on three factors: (1) It has become much more equity-like in its behavior, reducing its ability to hedge equity risks. (2) Costs and liquidity make it less desirable—we never liked its 85 basis-point operating expense. Nor did we like the three-day hold before cash distribution on sell orders. And (3) the expected return profile is significantly below equities because the return potential is tied more to the inflationary environment than equity market fundamentals.
We’re introducing a new tool for reducing volatility and capturing return for all of our portfolios.
New research by Robert Novy-Marx (2012) has identified a way to capture a dimension of expected returns related to profitability. Novy-Marx found that profitability, as measured by gross profits-to-assets, has roughly the same power as book-to-market in predicting the cross section of average returns. While this changes a very basic premise in the Fama/French value model, controlling for profitability dramatically increases the performance of value strategies, especially among the largest, most liquid stocks. And controlling for book-to-market ratios improves the performance of profitability strategies.
Another way of explaining this is that strategies based on profitability are growth strategies that also provide an excellent hedge for value strategies. Adding profitability on top of a value strategy reduces the strategies’ overall volatility. According to Novy-Marx, both profitability and value strategies generally performed well over the sample time periods, but both had significant periods in which they lost money. However, profitability generally performed well in the periods when value performed poorly, and vice versa. As a result, the mixed profitability-value strategy never experienced a losing five-year period (data set July 1963 – December 2010).
Dimensional Funds has aided in this new research and has identified a way to capture a dimension of expected returns related to profitability. Dimensional has made major advances with research in this area and has found a robust proxy that can be applied to portfolio management.
We have stayed in tune with this research and the recent announcements from Dimensional Funds. We’re excited to bring this new key ingredient to our clients and will be incorporating the profitability strategy into our AssetBuilder portfolios.
We will be introducing model portfolios in distribution.
For most of our lives we accumulate assets. But when we retire, our portfolios go into distribution, distributing interest, dividends and assets as needed. Research has shown that we can make our money (and income) last longer by annuitizing a portion of our assets
Annuitized income doesn’t increase the yield of a portfolio. It defines a guaranteed income stream and works to reduce the demand on the remaining portfolio for distributions in the first years of retirement. That, in turn, increases the odds of portfolio survival7. If you need a relatively high annual withdrawal and don’t have a pension, this solution may work for you. We believe this is a better solution for the income problem than reaching for higher yields and taking higher risks.