Comments on: Toward a New Concept of Asset Allocation

By: keithpiccirillo

keithpiccirillo — Sat, 11 Jul 2009 01:51:09 +0000

Luke, good post, I just finished reading “The Ivy Portfolio”, and need to re-read it again, as I started implementing some of these themes.

I started a position in some of Donald Coxe’s commodity fund (a major asset class) after everyone piled in and had to sell some at a loss, but he is a good jockey. I have the right horse but bet to place instead of show. LOL.
I would like to see MIT’s Dr. Andrew Lo somehow weave behavioural finance into asset allocation someday. The below lyrics tell just where we could be engineered to this decade.

http://www.stlyrics.com/songs/d/donaldfagen18793/igy512966.html

Following the hedge funds collective positions although tardy can be helpful, and reading all the time.
Momentum was the epitome of the past 3 months.

By: Luke O'Neill

Luke O'Neill — Fri, 10 Jul 2009 15:40:48 +0000

I should clarify my last sentence above. Momentum, I believe, capture a great deal of the risk payoff curve…but only if you have a relatively short time horizon – especially one year or less but even up to 2-3 years it can work somewhat well. If you’re looking for long-term strategic asset allocation (which I believe is perhaps a less ideal approach unless you are extremely tax-sensitive), then momentum carries less explanatory power.

By: Luke O'Neill

Luke O'Neill — Fri, 10 Jul 2009 15:13:20 +0000

All interesting thoughts, David. After a period of reasonably stable correlations between asset classes, it seems to me that we may well be entering a prolonged period in which markets don’t “behave” as normal. I believe that 2008 could very well be that bright line in the sand that serves as the impetus for a regime change and that point at which in makes much less sense to look backward to how asset classes have historically worked together.

Michael Maubossin at Legg Mason has written an interesting article (http://www.leggmason.com/individualinvestors/documents/insights/D6418-Sociology%20of%20Markets.LMIS.pdf) that discusses, among other things, how asset class returns are greatly impacted by non-fundamental issues such as where the capital is flowing from (individuals, institutions, what type of institutions, SWF’s, etc.). This type of information speaks directly to at least 3-4 of your basic questions above. Also, I think Mebane Faber’s work/paper on GTAA and asset class cross-sectional momentum is a powerful but fairly simple idea that has worked wonderfully well historically and, I believe, will work as well or better going forward based on the inherent unknowns surrounding so many asset classes. Interestingly (at least to me!), the simple idea of momentum, perhaps with a bit of mean reversion sprinkled in, seems to capture a great deal of the essence of the risk payoff curve and underlying changes to asset classes that may not be fully appreciated by most market pontificators.

By: FSharpe

FSharpe — Fri, 10 Jul 2009 12:36:00 +0000

Very interesting! My main problem with modern portfolio theory is that it only works with stable/known correlations and returns. And it’s made worse when the correlations change because un-correlated assets are chased because of modern portfolio theory…

What I use is a much more simple version of your ideas: try to determine the future returns per asset in the next few (7 to 10) years and the downside risks, and base the allocation on that.

By: q

Fri, 10 Jul 2009 11:56:11 +0000

FYI, this also new this morning and interesting.

http://blogs.cfr.org/setser/2009/07/09/the-lunch-may-be-free-but-how-much-is-it-worth/#comments