2012 Markowitz Awards Laud Innovative Practices in Asset Management

Since their co-founding in 2010 by New Frontier Advisors and the Journal Of Investment Management (JOIM), the annual Harry M. Markowitz Awards continue to recognize the transcendental impact of the work of Nobel Prize winner Markowitz as a financial economist and mathematician — with particular emphasis on theoretical finance and innovation in the practice of asset management.

For 2012, the top honor was bestowed upon Moshe Levy and Richard Roll for their paper entitled “A New Perspective on the Validity of CAPM: Still Alive and Well.” In their treatise, the authors demonstrate that the Capital Asset Pricing Model, a leading financial theory, cannot be empirically rejected, contrary to many academic studies that suggest otherwise. Levy and Roll use a reverse-engineering approach for testing the model, showing that with slight variations in the statistically estimated parameters, CAPM still remains a consistent and valid approach for portfolio creation. Two special distinction awards were also presented for the papers, “Comment on the Theoretical and Empirical Evidence of Fundamental Indexing,” authored by Jeffrey Graham, and “Lifecycle Consumption-Investment Policies and Pension Plans: A Dynamic Analysis,” co-authored by Zvi Bodie, Jerome Detemple, and Marcel Rindisbacher.

To honor the Markowitz legacy in support of future research and innovation in practical asset management, award candidates are selected from papers published in JOIM each calendar year, with the finalists chosen by a panel of Nobel Prize winners. Papers are judged based on their practical significance, technical excellence, and theoretical quality. The top winner receives a $10,000 honorarium, and each of the two special distinction award recipients receives a $5,000 honorarium.

The Graham paper scrutinizes the Arnott and Hsu theory that fundamental indexing is a superior performer over cap-weighting. He contends that fundamental indexing requires an implicit assumption that investors know the “fair value” price in a mean-reverting process. Without this assumption, however, he points out that fundamental indexing is subordinate to cap-weighted indices. Moreover, through use of simulation tests — an approach we advocate for portfolio optimization — Graham concludes that no empirical evidence exists to indicate any likely underperformance of cap-weighted versus fundamental indices. From an asset management perspective, his contention has targeted appeal to those interested in capital values associated with global risk premiums. The Bodie-Detemple-Rindisbacher paper is a detailed study of life-cycle finance theory with practical applications. Some of the issues addressed include saving-and-investment lifetime prescriptions for individuals, best practices for optimal pension plan design, and proper financial services and regulatory policies. As a particular noteworthy feature, the paper challenges an idea in target-date funds calling for an individual’s exposure to equities to automatically decline as a person ages.

From New Frontier’s investment horizon, we couldn’t be more pleased with the recipients of the 2012 Markowitz Awards for their gifted thinking and exemplary research and innovation in practical asset management.