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There Are Two Fundamental Flaws With The Risk Parity Asset Allocation Strategy (The Wall Street Journal)
Many advisors have been in favour of using risk parity as an allocation strategy writes Charles Stucke, CIO of New York-based Guggenheim Investment Advisors in a new WSJ column. This refers to an equal distribution of risk among all the asset classes in a portfolio. But Stucke thinks there are two “flaws” with this strategy.
“The first flaw is risk parity’s use of volatility as a measure of risk. Volatility can be a measure of risk if distributions are normal or quasi-normal, meaning, for example, that extreme events should happen as infrequently as normal distributions imply. Historically, this has not been true. Most financial assets move well beyond what is shown by normal distributions, so volatility cannot fully capture that risk…
“Secondly, modern portfolio theory and risk parity tend to lead advisers to leverage portfolios based on these faulty assumptions of risk, which, in turn, persuades them to over-invest in fixed income assets such as bonds and other investments at price levels they may regret later to evenly distribute that risk.”
Paul Bosse, Brian Wimmer, and Christopher Philips of Vanguard argue that investors often pick an actively managed mutual fund believing “that the fund’s stated benchmark accurately represents that fund’s average sector exposure over time.” But often advisors will move towards riskier market segments in search of better returns and this has meant “a consistent and sizable overweighting to corporate bonds, on average, over the past 15 years.” They think it is important for investors to realise that “this corporate bond bias noticeably alters the risk profile of active bond funds from that of their benchmark,” and this could lead to more volatility in their portfolio than they expect.
63% of Americans that sought financial advice in 2013, asked for information on saving for retirement, up from 52% the previous year, according to TIAA-CREF’s Financial Advice Survey. Almost half those seeking advice were having a hard time finding advisors they could trust.
Morgan Stanley’s Joachim Fels is worried about a 1913 scenario and its impact on the global economy. “Why worry now if even the Great Financial Crisis of 2008 didn’t result in a de-globalization of economic activity and financial markets?” he asks.
“Well, neither did the Panic of 1907 on Wall Street, which preceded the final hurrah of the Golden Age of globalization and paved the way for the creation of the Federal Reserve in, yes, 1913. Following the 2008 crisis, central banks and governments around the world opened the floodgates to prevent a depression (and rightly so) and fuelled a powerful rebound in economic growth, global trade, asset markets and capital flows. Yet, one unintended consequence of QE and ZIRP was a rush of liquidity into emerging markets, which offered a seemingly successful growth model and thus higher expected returns.
Fels points out that the emerging market growth model seems to face challenges. “A localisation or renationalisation of investment has already taken place in euro area financial markets in response to the euro area debt crisis. Could we now see a similar move globally?”
The Top 5 Wirehouse Advisors Of 2013 (WealthManagement.com)
WealthManagement.com is out with its Top 100 Wirehouse Advisors List. These advisors have the most assets under management (AUM) and we highlighted the top five. 5. Erik Bjerke of Merrill Lynch Wealth Management with $US15.9 billion in AUM. Bjerke specialises in wealth management. 4. Mark Curits of Morgan Stanley (Graystone Consulting) with $US16 billion in AUM. Curtis specialises in ultra-high-net-worth clients, global stock plan services.
3. Roger V. Coleman of Morgan Stanley with $US20.03 billion in AUM. Coleman specialises in wealth management, global equity plan administration and trading. 2. Fredrick Ley of Merrill Lynch Wealth Management with $US20.508 billion in AUM. Ley specialises in wealth management. 1. Gregory Ley of Merrill Lynch Wealth Management with $US20.511 billion in AUM. Ley specialises in wealth management.
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