THE BLOG

31
Aug

Why Stock-to-Bond Ratios are Poor Measurements of Risk

Content provided by Joseph Smith, CFA, Senior Market Analyst

  • Risk Budgeting makes CLS different in its ability to measure and manage risk in portfolios.
  • Risk Budgeting is not the same as managing to a stock-to-bond ratio.
  • Stock-to-bond ratios can lead to undesirable levels of risk for long-term investors.

At CLS, we differ from our money-managing peers because we use our Risk Budgeting Methodology to not only measure risk in a portfolio, but more importantly, to manage risk on an ongoing basis. This process, as outlined in our Risk Budgeting Whitepaper, involves incorporating multiple measures of risk to ensure solutions engineered for clients keep them on track to their primary objectives and aligned with their appropriate Risk Budget scores.

So, does Risk Budgeting mean managing to a target stock-to-bond ratio? My short answer is absolutely not! In fact, stock-to-bond ratios are the worst proxies for the amount of risk an investor takes because they lean on a simple rule of thumb that has no bearing on what is currently happening in the markets.

The historical 60/40 portfolio (60% as the Equity Baseline Portfolio (EBP) and 40% as the Fixed Income Neutral Views Portfolio) illustrates this point clearly. In looking at the rolling, 3-year relative risk characteristics of a static 60/40 portfolio versus the EBP, we find risk overall is not consistent with a target expectation of maintaining 60% of the risk of a Global Equity portfolio.

 

 

In some cases, the risk associated with a static 60/40 can be modestly higher than what is intended. The only consistent aspect of managing to a stock-to-bond ratio is the stock-to-bond ratio is never moving.

Simply put, Risk Budgeting is a superior method of managing assets because it not only measures risk in a portfolio at all points in time, but it is flexible as risk changes in the markets.

The inflexibility of stock-to-bond ratios can lead to unexpected levels of risks that may not be consistent with an investor’s longer-term objectives or tolerance for risk.

2881-CLS-8/23/2017

31
Aug

Fuse 2017 Starts in One Week

Get ready for the year's biggest and best developer-focused fintech event, because Fuse 2017 is only one week away from shaping your Orion experience.

The post Fuse 2017 Starts in One Week appeared first on Orion Advisor Services.

29
Aug

Fuse 2017 Profile: Michael Kitces

Fuse judge profile Michael Kitces

In the months leading up to Fuse 2017, we’re profiling the event’s panel of judges. This week’s profile is Michael Kitces.

The post Fuse 2017 Profile: Michael Kitces appeared first on Orion Advisor Services.

24
Aug

See Our Newest Integration Partner

See our newest Orion integration partner in today's Orion Weekly. Watch today's video to learn more about FutureVault, plus more!

The post See Our Newest Integration Partner appeared first on Orion Advisor Services.

22
Aug

How Portfolio Groups Enhances Reporting

Orion Portfolio Groups can give your firm enhanced functionality to create more educational conversations with clients.

The post How Portfolio Groups Enhances Reporting appeared first on Orion Advisor Services.

18
Aug

Some Trading Maxims That Influenced My Investing

Content provided by Rusty Vanneman, CFA, CMT, Chief Investment Officer

Years ago, I worked with bond and currency traders around the world (mostly in New York City, Chicago, and London), providing trading recommendations and market commentary every 20 minutes during market hours. The work environment was fast-paced, fun, and absolutely awesome in terms of being totally immersed in the markets. I learned a ton and made many friends that I still have today.

But, that frenetic approach to the markets is nothing like how I invest these days, professionally or personally (which both are basically the same). It’s also not how I recommend anybody invests. It’s simply too crazy and demands too much time, emotion, and expense. It’s a tough game to play, and particularly so for any duration. There aren’t many old traders.

(To be clear on definitions, I define trading as an inherently short-term activity. One may hold a position for only days, or as short a time period as minutes or even seconds. Investing meanwhile, is a long-term activity, measured in years, if not decades).

Nonetheless, there were many valuable principles I learned that influence how I think about the markets today. Here are three market maxims, and why I think they’re important:

  1.     “Let your winners run, and cut your losers short.”

This is probably one of the most important keys to successful trading or investing.

For starters, many investors simply hold on to their losing positions too long, letting them get much deeper in the process. They might be emotionally attached to the position. Or, they have too much pride. Or, they don’t want to be wrong. In some cases, substantial losses result, often sabotaging overall portfolio returns. There is no reason this should happen in a taxable account. One could simply harvest tax losses to offset future realized gains. If the positions are held in non-taxable accounts, there should still be a disciplined process in place that will help investors get out of losing positions. Stop losses, regular reviews, or checklists are three tools that could be used.

Losses are not the only problem. Many investors like to realize gains in winning positions too quickly. From an emotional standpoint, it’s often satisfying to take the gain. It’s a win! Money in the bank. But, most successful investors attain success from their long-held positions. The big winners have an outsized impact on their overall portfolio success.

        2.    “The market moves in the direction that causes the most pain.” Or, on a related note: “What is comfortable is rarely profitable.”

Consensus thinking is wrong so often on Wall Street, it is amazing people continue to invest in what they think is “safe” by investing in what is popular. In my experience, the market moves in the direction most don’t expect — the direction that causes the most pain.

This actually makes sense. When there is an imbalance of emotion in a particular investment and investors are positioned accordingly, expectations make the investment become vulnerable to a reversal.

For instance, if most investors think a particular technology company will continue to grow at a spectacular earnings growth rate (let’s say 50% for example, which would be a supremely high expectation since the average company has pulled in earnings growth closer to 6% over the last 90+ years), they may bid up the company’s stock price and valuation. So, what happens when the growth rate is actually 50%? Perhaps not much. It was already priced into the stock price. Now, what if the growth rate is only 40%? That is still spectacular growth, but it’s below the stock’s expectations and what valuations warrant, so it’s probably a poor result for those who own the stock. And, what if earnings growth falls toward the long-term average — like all companies ultimately do? Not good.

        3.    “The train has left the station.”

This saying is a favorite of mine. It may not be as popular as the maxims above, but it captures a key principle behind many successful investments. And, quite frankly, it’s fun to say.

As it relates to investing, this saying refers to a situation where a particular asset class hasn’t gone anywhere in a while (it’s at the station), but has finally started to move and is likely ready to embark on a major trip. Many relative, value-oriented managers, such as CLS Investments, like to buy assets that have underperformed recently and are now undervalued and priced for relatively superior returns moving forward. Once the market starts to reverse the prior underperformance and appears to potentially (hopefully) have a long run of good performance ahead, then “the train has left the station”.

A good example, particularly in recent quarters, is emerging markets. After lagging for many years, emerging market stocks have started to outperform handily. We hope the train left the station for emerging markets last year and the sector has a long journey still to go.

The trading experience in the early years of my career helped me learn many techniques of successful (and not so successful) trading and investing and helped inform and shape my decision-making process. The maxims above are three of the most impactful I’ve learned thus far. Stay tuned for more in future blogs!

2827-CLS-8/10/2017

 

17
Aug

Our New Software Update Drops August 19 – Here’s What You Need to Know

Our new Software Update comes out Saturday. Check out today's Orion Weekly to get all the details for how your Orion experience will improve.

The post Our New Software Update Drops August 19 – Here’s What You Need to Know appeared first on Orion Advisor Services.

16
Aug

Open Doors

Content provided by Robyn Murray, Freelance Writer

Bailey Neben was scanning the Babson College alumni directory when she realized she was just one of 13 Nebraskans to ever attend the Boston-based university. Who were these fellow Cornhuskers? What drove them to the East Coast? Did they ever go back home? She started wondering about this small circle and wanted to know more. She also wondered if anyone in the group might be able to connect her to opportunities in the real world. So, she decided to reach out. She sent a note to each name on the list, and — happily for CLS — one of those names was Rusty Vanneman.

“Bailey impressed me from the start,” Vanneman said. “She is bright, eager, and full of energy.” They met in person at the CLS office over her winter break. “At first, I was just contacting him to find out his story,” Neben said. “How did he get to Babson and when did he go back to Nebraska? Then it became: ‘What am I doing over the summer?’” As sophomore, Neben presents herself with confidence and poise, taking charge of a room and articulating her thoughts and ideas with self-possessed style. She is concentrating in accounting and finance at Babson, leaving both doors open while she figures out which career path suits her best. Today, she is wrapping up an internship at CLS where she split her time between sales and portfolio management. More doors left open: two of many she is likely to have in her future.

“I wanted to break out of my box”

Neben grew up in Waverly, Nebraska. It’s a small town of about 3,700 people just outside Lincoln. She attended the same school for 11 years and saw the same faces every day. “I was with the same 140 people in my class my entire life,” she said. She noticed the people who graduated ahead of her stuck within their own familiar circle, and she wanted something more. “I wanted to break out of my box,” she said, “and meet new, different people that weren’t from Nebraska.”

So, Neben decided to head to the East Coast. She wanted to be near a big city where there was always something to do and opportunities abound. She was drawn to Babson because of the college’s focus on academics. She’d always been good at math, so she knew she wanted to do something with numbers. In high school, she had taken an accounting course that she loved where she had to manage a fake company’s books. It was a two-month project that she finished in two weeks. “I did that for hours at home just because it was fun for me to do,” she said.

Going to Babson was tough at first. She had to make new friends, and for the first time in her life she couldn’t turn to her parents or older sister, who she has always looked up to, for help. “It was a big change for me,” she said. “But it gave me some independence.” The transition was helped by the amount of diversity at Babson. Neben knows the figures by heart: Babson is 30% international students; within domestic, it is 50% multiracial with 48 states represented. “It gave me a new perspective on all the other things that are out there,” she said.

Neben soon settled in. She joined a sorority and Babson’s theater group and became a career advancement ambassador, giving campus tours and meeting alumni. But, she was still thinking about the Nebraska alumni. Her meeting with Vanneman had gone well; he had offered her an internship back home, and she was excited to take it.

She began at CLS in May. Her internship is part sales and part portfolio management. On the sales side, she’s helped get proposals out to advisors and put together a list of self-directed plans. “Jobs that make [the sales team’s] lives easier,” she said. In portfolio management, she has helped Kostya Etus write a paper on Environmental, Social and Governance (ESG) investing and Josh Jenkins work on a CLS certification project. She’s hoping it will be complete by the end of the summer so she can see the end result of her work. “It’s been amazing,” she said. “I don’t think any of my friends have internships where you’re actually doing real things.”

Neben says she’s also learned about what it takes to work in an office — an environment she thought would be very different from the collaborative atmosphere at CLS. “I was thinking it would be more cutthroat,” she said. “But everybody’s friendly and very professional at the same time.” She said she’s grateful to the team for helping her every way they can — even making introductions to people outside the office that have already led to new opportunities. “It’s not just about them,” she said. “It’s about me, too, and I’m grateful for that.”

Vanneman says Neben has exceeded even his “lofty expectations.” “I always expect members of my team to give 100%, which Bailey was able to do from nearly day one,” he said. “She has been a very high producer, in addition to being fun to be around.”

Before Neben leaves CLS, she’ll spend a few days in the accounting department getting a feel for how things work there. She’s still not sure which way she’ll go. She enjoys accounting because it’s straightforward and focused on rules and processes, but she likes finance too because it’s the opposite: different every day and subject to market whims and global events. The portfolio management team is “definitely not doing the same thing every day,” she said, “which is really intriguing.”

Next summer, Neben hopes to secure an accountancy internship through Babson, so she can get a proper feel for that side of the financial world. In the meantime, she has a few words of advice for the next intern at CLS: “No question is a small question,” she said. “And take as much work as you can.” In other words: Open as many doors as possible.

2843-CLS-8/14/2017

16
Aug

Orion August 2017 Software Update Full Release Notes

Today's post features all the updates and enhancements you can expect in the Orion August 2017 Software Update coming out this weekend.

The post Orion August 2017 Software Update Full Release Notes appeared first on Orion Advisor Services.

15
Aug

Fuse 2017 Judge Profile: Billy Oliverio

Fuse 2017 Judge Profile: Billy Oliverio

In today's blog, hear from Fuse 2017 Judge Billy Oliverio, returning for his fourth straight event, about all the fintech he's excited to see this year.

The post Fuse 2017 Judge Profile: Billy Oliverio appeared first on Orion Advisor Services.