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HOW MUCH SHOULD PORTFOLIOS ADAPT OVER TIME?

17/10/2023

 
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Markets don't stand still. Should portfolios?
We explore two apparently opposing schools of thought.
Read the full article in FT Adviser

Simple. Effective.  Equal-weight.

15/7/2022

 
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[5 min read, open as pdf for full article]
  • A straightforward approach to reduce concentration risk
  • Reduces “the big get bigger” effect of cap-weighted “passive” indices
  • Scope for outperformance relative to traditional indices

Critics of tracker funds often flagged concentration risk or the “big get bigger” approach of passive investing as a structural flaw to index investing.  But concentration risk is a choice, not an obligation for the index investor.

​As would be expected, an equal weight approach has proved relatively more defensive in the down-market year-to-date.  The S&P500 Equal Weight index has returned -5.2% against the traditional S&P 500’s -9.3% YTD, in GBP terms.

For more on this topic, please see our CISI-endorsed CPD webinar:
The curious power of equal weight, with guest speaker Tim Edwards, Managing Director, Index Investment Strategy, S&P Dow Jones Indices

Understanding SPIVA

22/10/2021

 
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[Open full article as pdf]

  • Long-only retail active management is a zero-sum game
  • The evidence from SPIVA
  • Adopting a more nuanced approach to find alpha
 Active management is a zero sum gameIn game theory, a zero-sum situation occurs when one person's gain is equal to another's loss. And as set out with breath-taking simplicity in Nobel-prize-winning economist William Sharpe’s 1991 paper “The Arithmetic of Active”, active management is a zero-sum game.  Rather than have us try to reinvent the wheel, here are Eugene Fama & Kenneth French explaining the idea in a 2009 essay:
“Suppose we define a passive investor as anyone whose portfolio of U.S. equities is the cap-weight market portfolio described above. Likewise, define an active investor as anyone whose portfolio of U.S. equities is the not the cap-weight market portfolio. It is nevertheless true that the aggregate portfolio of active investors (with each investor's portfolio weighted by that investor's share of the total value of the U.S. equities held by active investors) has to be the market portfolio. Since the aggregate portfolio of all investors (active plus passive) is the market portfolio and the aggregate for all passive investors is the market portfolio, the aggregate for all active investors must be the market portfolio. All this is obvious. It is just the arithmetic of the fact that all U.S. equities are always held by investors. Its implications, however, are often overlooked.”
What Bill Sharpe was saying to us was this: the performance of all active managers is, in aggregate [for a given asset class] that of the index less active fees.  Which is a considerably worse deal than the charge often levelled against passive funds, namely that investors are paying for the performance of the index less passive fees.

CPD Webinar: Is active management a zero-sum game?

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  • WHO WE ARE
    • About
    • Contact
    • Events
    • Press
  • WHAT WE DO
    • Portfolio Solutions >
      • Our Portfolios
      • Custom Portfolios
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      • Our Funds
      • Custom Funds
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      • Our indices
      • Custom Indices
    • SPECIALIST STRATEGIES >
      • Money Market Funds
      • Retirement Income Solutions
      • Retirement Portfolios
      • Adaptive Portfolios
      • UK Equity Income
      • Multi-Asset Income
      • Liquid Real Assets
      • Dynamic Risk Parity
      • Gold and Precious Metals
      • Enabling Net Zero
    • Supporting Advisers >
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    • CPD
  • WHO WE HELP
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