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Fixed income funds have many important functions in global capital markets.  Life insurance companies may buy long-term bonds to hedge long-term life insurance policies.  Commercial insurance companies may purchase intermediate-term bonds to hedge various shorter-term liabilities.  Pension funds may buy various maturity bond funds to match vested retirement liabilities. Central ...

The Federal Reserve’s announcement of continuing the stimulus program without change surprised many investors and pundits.  The media is much guilty of the hype surrounding the September announcement. In a note sent to our investors on the 9th we indicated that the most likely scenario in our view was that the Fed would continue the stimulus program unchanged and that tapering ...

Dr. Richard Michaud wrote the following on September 6th.  On September 9th, we sent it to our investment clients: “The August labor report just came in today.  It is a bit weaker than expectations and July and June revisions were downward, some significantly.  While no one can predict what the FOMC will do, I think it is fair to say no one will be predicting a startup of seri ...

Risk parity strategies gained a lot of attention in the post-2008 world of investment products. In a fit of defensive anxiety, investors flocked to products based on methods which purportedly would have lost less during the crisis. A recent Wall Street Journal article claims that “Assets in risk-parity mutual funds totaled $15.1 billion at the end of May, up from $73.6 million ...

Most traditional optimizers have two inputs – mean and variance. In fact, most portfolio optimization frameworks pit some notion of return against some notion of risk. The conventional wisdom in the finance practitioner community is that high quality, accurate estimates are available for the risk inputs, whereas the expected return estimates are highly proprietary and subject t ...

Investors have nervously anticipated the end of the Federal Reserve policy of stimulating U.S. economic growth with quantitative easing (QE3).  The June 19^th report by the Federal Reserve Chairman on the state of the economy reflected an unexpectedly positive view of the recovery.  As a result...

Clients aware of the recent stretch of low yields for U.S. Treasuries have been asking their managers to explain why their portfolios contain long bonds. Given that ten-year bonds have been yielding about 2% and thirty-year bonds around 3%, near historical lows for the U.S., many clients question their exposure to interest rate risk. In this article we will attempt to elucidate the role played by long bonds in a well-constructed portfolio, and to provide some additional talking points that could be helpful for the advisor addressing questions about long bonds from their clients.

Once a portfolio has been designed and implemented, what happens next? Studies show that asset mixes as well as proper rebalancing are keys to successful ROI. However, a portfolio based on certain historical statistical and financial analysis during a specific period in the past may only be valid for an indeterminate length of time. Macro and micro economics and their accompanying market conditions are continuously changing. So, how does an investment manager decide when it’s time to rebalance a portfolio?

Having a strong research and development presence is an extremely important part of any serious investment management effort. The most important theoretical concept underlying portfolio management today – Modern Portfolio Theory (MPT) — is a work-in-progress.

Since Harry Markowitz published his revolutionary paper in 1952 which eventually led to the development of a whole new branch of finance and a Nobel Prize four decades later, Modern Portfolio theory (MPT) has played an important part in investment management. However, what Modern Portfolio Theory promised in its genius of the Efficient Frontier was never borne out in its ability to produce practical portfolios. The failure is mainly due to certain unrealistic assumptions within Markowitz’s solution to the asset allocation problem. More specifically, ...