CMG AdvisorCentral

Tactical investing news, views and resources for financial advisors

TwitterGoogle+Linkedin
  • Blog
    • Contributors
  • Advisor Resources
  • About CMG
    • Sitemap
  • Events
You are here: Home / Portfolio Construction / What is Enhanced Modern Portfolio Theory?

What is Enhanced Modern Portfolio Theory?

Posted on 01.10.14 |

It’s time for Enhanced Modern Portfolio Theory

Stephen Blumenthal, CEO< CMG Capital Management GroupIt’s not that Modern Portfolio Theory (MPT) is wrong, rather that it’s time to question whether 60/40 remains the best way to optimize the risk-reward relationship. This asset mix is simply too narrow in the current low-dividend-yield, low-inflation, low-interest-rate environment.

Fortunately, over the past 15 years a host of new, liquid investment solutions have become available, and advisors have access to investment options that, until recently, were the exclusive province of institutions. These investment vehicles can help you build more diverse, resilient portfolios designed to enhance return and reduce overall portfolio risk.

Most important, helping clients understand the new investment environment and the choices available to them can build your client base and boost revenue per client. Generally described as “tactical investments,” these options aim to remove the restraints of traditional benchmark investing.

Three Investment Buckets

Consider three more or less equally weighted buckets: equity (33%), fixed income (33%) and tactical trading (34%). This expanded portfolio construction, combining a number of diverse and non-correlating risks, is far more aligned than 60/40 with the definition of MPT, at least according to Wikipedia: “a mathematical formulation of the concept of diversification in investing, with the aim of seeking a collection of investment assets that has collectively lower risk than any individual asset.”

We call the concept of converting the traditional 60/40 portfolio to 33/33/34 Enhanced Modern Portfolio Theory and we believe it represents what a balanced portfolio should look like in today’s market.

The enhanced modern portfolio is constructed with the intent of capturing upside potential while mitigating downside risk. The objective is to smooth the return stream over time, instead of being whipsawed by volatile markets.

Equity and Fixed Income

It is important to have broad equity coverage that capitalizes on positive market moves, like those we have experienced lately. Most advisors are familiar with mutual funds and ETFs that can accomplish this, but it is equally important to hedge the equity exposure, given the systemic risks in the low-dividend/high-debt world in which we now live. As for fixed income, historically low yields and the threat of future inflation require a cautious view of bonds. High-yield bond funds have been one answer, but recessions and periods of rising interest rates can be particularly painful for such funds. Adding exposure to emerging market bond funds or ETFs might be a viable solution.

Tactical Investment Strategies – the 3rd bucket

We strongly believe that tactical strategies should be a central component in any modern portfolio. “Tactical” simply means that the manager is not dependent on a bull market to make money. The manager can maneuver the portfolio to maximize participation in up trends while minimizing the impact of market sell-offs. We classify the tactical space into three categories: tactical equity, tactical fixed income and tactical long or short.

Some strategies can change weightings and exposure to different asset classes, while others trade against a benchmark like the S&P 500 Index or trade a single asset, like long-term Treasury bonds. But they have the flexibility to trade in both up-trending and down-trending environments.

Another popular approach looks at the relative strength of several ETFs and allocates to the two best performers. There are a lot of new strategies out there, and it can be difficult for advisors to figure out which will work best for clients. But no matter which approach you choose, the period ahead calls for an enhanced portfolio with broader — and, we believe, smarter — construction. –  Stephen Blumenthal

Print Friendly, PDF & Email

Categories: Portfolio Construction

Top Posts

  • Building A Hunker Down ETF Portfolio - Blumenthal at Barron's
  • Blumenthal in WSJ on Valuations And Forward Returns
  • CMG's Total Portfolio Solution Whitepaper Free Download
  • CMG Adopts GIPS Standards Verified By Ashland Partners
  • Charting The New Bull Market in Gold - Blumenthal in Forbes

Categories

  • CMG News
  • Conferences
  • Equities
  • Fixed Income
  • Global Economy
  • Market Snapshot
  • Marketing
  • Monetary Policy
  • Portfolio Construction
  • Practice Management
  • Tactical Investment Strategies
  • top posts

Archives

Browse the blog A-Z

CMG CAPITAL MANAGEMENT GROUP, INC. • 1000 Continental Drive, Suite 570 • King of Prussia, PA 19406 • P:610.989.9090 • E:advisors@cmgwealth.com

©2018 Capital Management Group, Inc, All Rights Reserved

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk. Therefore, it should not be assumed that future performance of any specific investment or investment strategy (including the investments and/or investment strategies recommended and/or undertaken by CMG Capital Management Group, Inc (or any of its related entities-together "CMG") will be profitable, equal any historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. No portion of the content should be construed as an offer or solicitation for the purchase or sale of any security. References to specific securities, investment programs or funds are for illustrative purposes only and are not intended to be, and should not be interpreted as recommendations to purchase or sell such securities.
Certain portions of the content may contain a discussion of, and/or provide access to, opinions and/or recommendations of CMG (and those of other investment and non-investment professionals) as of a specific prior date. Due to various factors, including changing market conditions, such discussion may no longer be reflective of current recommendations or opinions. Derivatives and options strategies are not suitable for every investor, may involve a high degree of risk, and may be appropriate investments only for sophisticated investors who are capable of understanding and assuming the risks involved. Moreover, you should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from CMG or the professional advisors of your choosing. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisors of his/her choosing. CMG is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice.
This presentation does not discuss, directly or indirectly, the amount of the profits or losses, realized or unrealized, by any CMG client from any specific funds or securities. Please note: In the event that CMG references performance results for an actual CMG portfolio, the results are reported net of advisory fees and inclusive of dividends. The performance referenced is that as determined and/or provided directly by the referenced funds and/or publishers, have not been independently verified, and do not reflect the performance of any specific CMG client. CMG clients may have experienced materially different performance based upon various factors during the corresponding time periods.
Hypothetical Presentations: To the extent that any portion of the content reflects hypothetical results that were achieved by means of the retroactive application of a back-tested model, such results have inherent limitations, including: (1) the model results do not reflect the results of actual trading using client assets, but were achieved by means of the retroactive application of the referenced models, certain aspects of which may have been designed with the benefit of hindsight; (2) back-tested performance may not reflect the impact that any material market or economic factors might have had on the adviser’s use of the model if the model had been used during the period to actually mange client assets; and, (3) CMG’s clients may have experienced investment results during the corresponding time periods that were materially different from those portrayed in the model. Please Also Note: Past performance may not be indicative of future results. Therefore, no current or prospective client should assume that future performance will be profitable, or equal to any corresponding historical index. (i.e. S&P 500 Total Return or Dow Jones Wilshire U.S. 5000 Total Market Index) is also disclosed. For example, the S&P 500 Composite Total Return Index (the “S&P”) is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the stock market. Standard & Poor’s chooses the member companies for the S&P based on market size, liquidity, and industry group representation. Included are the common stocks of industrial, financial, utility, and transportation companies. The historical performance results of the S&P (and those of or all indices) and the model results do not reflect the deduction of transaction and custodial charges, nor the deduction of an investment management fee, the incurrence of which would have the effect of decreasing indicated historical performance results. For example, the deduction combined annual advisory and transaction fees of 1.00% over a 10 year period would decrease a 10% gross return to an 8.9% net return. The S&P is not an index into which an investor can directly invest. The historical S&P performance results (and those of all other indices) are provided exclusively for comparison purposes only, so as to provide general comparative information to assist an individual in determining whether the performance of a specific portfolio or model meets, or continues to meet, his/her investment objective(s). A corresponding description of the other comparative indices, are available from CMG upon request. It should not be assumed that any CMG holdings will correspond directly to any such comparative index. The model and indices performance results do not reflect the impact of taxes. CMG portfolios may be more or less volatile than the reflective indices and/or models.
In the event that there has been a change in an individual's investment objective or financial situation, he/she is encouraged to consult with his/her investment professionals.
Written Disclosure Statement. CMG is an SEC registered investment adviser principally located in King of Prussia, PA. Stephen B. Blumenthal is CMG's founder and CEO. Please note: The above views are those of CMG and its CEO, Stephen Blumenthal, and do not reflect those of any sub-advisor that CMG may engage to manage any CMG strategy. A copy of CMG's current written disclosure statement discussing advisory services and fees is available upon request or via CMG's internet web site at (http://www.cmgwealth.com/disclosures/advs).