Traditionally, a diversified portfolio has been split among U.S. stocks, foreign stocks, bonds, and cash. More recently, the concept has been expanded to include additional asset classes such as real estate, gold, commodities, emerging markets, currencies, alternatives, hedge funds, and foreign bonds.
However, since the turn of the century, investors have learned that traditional diversification strategies did little to protect them from the two brutal bear markets that occurred within a nine-year span. As such, Numetrix believes that classic asset allocation alone falls woefully short of investors’ needs.
Numetrix believes that investors need to be truly diversified in terms of investment strategies, holding timeframes, methodologies, underlying asset classes, and most importantly, investment managers.
Traditional, Not-So Modern Portfolio Theory
A great many financial advisors utilize ‘Modern Portfolio Theory,’ which, interestingly enough, was developed between the 1950 and 1970.
According to Wikipedia, “Modern Portfolio Theory (MPT) is a theory of finance that attempts to maximize portfolio expected return for a given amount of portfolio risk, or equivalently minimize risk for a given level of expected return, by carefully choosing the proportions of various assets.”
“More technically, MPT models an asset’s return as a normally distributed function (or more generally as an elliptically distributed random variable), defines risk as the standard deviation of return, and models a portfolio as a weighted combination of assets, so that the return of a portfolio is the weighted combination of the assets’ returns. By combining different assets whose returns are not perfectly positively correlated, MPT seeks to reduce the total variance of the portfolio return. MPT also assumes that investors are rational and markets are efficient.”
In recent years however, MPT approach has come under fire as evidence has surfaced that financial returns do not follow the prescribed distribution curve and that correlations between asset classes are far from fixed and can vary widely – especially in times of crisis.
Additionally, if the technology bubble bear market of 2000-02 and the credit crisis of 2008-09 taught us anything, it is that (a) investors are most definitely not rational and (b) markets are clearly not efficient.
The Need for Truly Diversified Portfolios
One of the primary objectives of Numetrix Capital is to create truly diversified portfolios that are capable of functioning effectively in today’s ever-changing and more volatile market environments.
The sad truth is the vast majority of investors do not have the time or expertise to create “real diversification” within their portfolio which, in our opinion, incorporates multiple managers using different strategies, styles, time frames, methodologies and asset classes.
The good news is Numetrix does this for you on an ongoing basis.
Numetrix brings together investment managers from six independent firms with more than 50 investment strategies in order to develop truly diversified portfolios.
However, it is important to recognize that a manager and/or a strategy will only remain active in a Numetrix portfolio as long as they are performing up to our expectations.
Numetrix Portfolio Solutions
Numetrix offers three distinct series of multi-manager, multi-strategy portfolio solutions.