Rethinking Portfolio Construction and Risk Management

An excellent piece was sent to me on the weekend from Bradley A. Jones, analyst at Deutsche Bank, entitled Rethinking Portfolio Construction and Risk Management.  A valuable read free from the everyday shark chum so ubiquitous in portfolio management theory.  Great points and excellent charts. (It also amounts to a wonderful summary of why we manage money the way we do at Venable Park). You can read the whole 60 page report here.  Here are his Concluding Remarks:

Evolution Ahead in Asset Allocation. The 60/40 Policy Portfolio, still the industry default setting, is far riskier than most think:

  • It is subject to unacceptably large and lengthy drawdowns/shortfall risk.
  • Has substantial embedded correlation risk (based on statistical/economic factors)
  • Ignores regime dependence, and is ill-equipped for a ‘stag-lite’ macro environment
  • At current valuation levels, offers virtually no prospect of realizing returns in line with the long-term average of 4% p.a. in real terms (more likely 1% p.a.)

Good stuff.  Quite a breath of fresh air.

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3 Responses to Rethinking Portfolio Construction and Risk Management

  1. taxpayer says:

    Thanks for reporting this. Some interesting stuff, but

    “New alternative sources of return will include genuinely orthogonal exposures like cat bonds, music/intellectual property rights, carbon/water credits, longevity swaps, etc.”

    Scary! Plenty of opportunity for the financiers to further abuse workers and entrepreneurs here.

  2. Very informative article but it left me more confused than ever. What’s a Do-It-Yourself investor to do? (Sorry, not near the 1 mill threshold to hire Venable Park)

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