Thursday, June 4, 2009

View from Pershing

Some disjointed observation at this show for registered investment advisors

1 - Put a wig on one of the guys here and he is Bernie Madoff.  Omen?
2- I heard from a connected soul that he could tell who was a broker. They were the ones walking around in a death march as the model of the business has left them in the dust. Their businesses are dying as they stick to the transaction based view of the world.  Customers changing? Seems so.
3- Advisors are still fighting last year's battle. "How do we reduce volatility?" they ask. The time to ask that was last year. Now we should be asking how to get more exposure to volatility unless of course, you still think a depression is coming.
4- Asset allocators are still making judgment calls as to when and how to reallocate their portfolios. I feel an article welling up inside about applying technical analysis to the process - not in timing any item in the portfolio - to let the market decide when it is time to reallocate. Sorry, can't let that cat out of the bag. Wouldn't it have been great NOT to shift more money into stocks last year as they continued to become a smaller portion of the portfolio? Hello falling knife.


Puppete said...

I will be interested to read your comments on the use of technical analysis to decide when to rebalance, since I am a buy and hold asset allocation investor and had been thinking about this issue. I find it interesting that asset allocation gurus usually say that there is a positive correlation of stock movement over periods of about 2 years or less and say you might want to give some time delay on when you rebalance, but then they claim the exact algorithm does not matter much. On the other hand, a primary tenet of technical analysis seems to be the very same correlation of price movement. I have read some of the academic articles that try to decide if a 200 day moving average strategy helps risk adjusted returns. My reading of that literature is that there is a reasonable preponderance of evidence in favor of this technical trading rule but it is hard to have a strict statistical proof because the value comes largely from the most extreme events. I wonder why say Bernstein would say timing of rebalancing does not matter whereas the 200 day moving average rule which if implemented for only a small portion of the portfolio might really be a delay of rebalancing seems to work well. Is the 200 day moving average rule magic? Is it data mining? Or did Bernstein get the answer he wanted based on his philosophy? It seems that there is a lack of communication based on philosophical differences here. From the asset allocator side there is disbelief in technical analysis based on the efficient market hypothesis that has been oversold. On the other hand, I am not aware from the technical analysis side of too much effort to reach out and tell asset allocators something simple, automatic and modest they might do and explain its virtues in their own language.

Tim Bain said...

Puppete - I was very interested to see your comments. My partner and I have been managing an ETF model based on widely used, "endowment style" asset allocation strategies that try to maximize the Sortino ratio of a portfolio. After going mostly to cash a little late in 2008 we began researching simple concepts that would help us limit downside deviation without completely sacrificing long term returns. We began with the simple 50/200 day cross and reviewed each asset class in our model to see if there was some other combination that worked "better". We were pleased to find that there seemed to be unique pairs that worked for various asset classes outside of fixed income. We have created a model based on that research and will be submitting a presenation to FINRA for approval. If you'd like to see it, I'd be glad to send it to you once it is approved. Feel free to e-mail me at