Portfolio Selection Redux - Measuring & Managing Portfolio Inefficiency
Agenda
Presented by guest speaker Jason MacQueen, Director of Research, Optimal Portfolio Strategies Ltd.
Most professional active managers do have useful stock selection skill, and yet they rarely outperform their benchmarks. Clearly, there is always a performance drag from transaction costs and management fees, but this is by no means the whole story.
While Markowitz’s concept of Portfolio Efficiency is widely known, few active managers realize that he also proved that efficient portfolios most accurately reflect stock selection skill in performance. Contrariwise, the more inefficient any active portfolio is, the more of the manager’s stock selection skill is wasted, and not reflected in its performance.
Portfolio Optimization is widely regarded as problematic, but the basic problem is not with the idea of Portfolio Efficiency, but rather with its implementation.
This webinar will present a Portfolio Rebalancing Methodology designed to maximize Portfolio Efficiency with minimal turnover. It introduces a way to measure the inefficiency of each holding in a portfolio, and to derive the portfolio manager’s Implied Risk Aversion. It also explains how to measure Uncertainty-Adjusted Portfolio Inefficiency. Finally, the paper introduces the Efficiency Coefficient, a metric that evaluates a manager’s Portfolio Construction Skill, just as an Information Coefficient measures their Stock Selection Skill.
About Jason MacQueen
Jason MacQueen built the first risk model for the U.K. equity market, and helped to construct the first U.K. index fund in 1979. He founded QUANTEC in 1980, which was the first firm to develop risk models for equity markets outside the USA, and which ultimately built risk models for all of the developed and most of the emerging markets. QUANTEC also built the first global asset allocation model, including currency hedging overlays and the first use of reverse optimisation for efficient portfolio rebalancing.
Jason pioneered the development and use of multi-factor stock selection models in both the U.S.A. and Japan, and the investment track records of his long-term collaborators are exceptional. During the 1990s, QUANTEC developed the first global risk model.
In 2000, Jason and his colleagues developed a risk model-based technique for the American Stock Exchange to enable them to offer Exchange Traded Funds (ETFs) on Actively-managed Mutual Funds without knowing the underlying holdings. This technology has been patented. However, the same methodology can be used by pension funds and asset owners to manage their portfolio risk without having full transparency from their external managers.
QUANTEC was sold to Thomson Financial in 2001, and after consulting to them for two years, Jason co-founded R-Squared Risk Management (RSQRM) to develop Custom Risk Models for institutional investors, so they could manage their portfolios more efficiently. RSQRM also developed a unique set of XRD equity risk models covering different geographies. Among other custom risk models, Jason and his colleagues developed the global equity risk model used in FactSet’s Multi-Asset Class (MAC) product.
In December 2014, RSQRM was acquired by Northfield, where Jason became the Director of Research. His main focus at Northfield was developing a second-generation global equity model for FactSet’s MAC product, which included additional style factors, regional sector factors and other enhancements.
Smart Portfolio Strategies (SPS) was founded in April 2015 to provide portfolio rebalancing services to equity portfolio managers and asset owners doing asset allocation. The SPS rebalancing algorithm ensures the greatest increase in portfolio efficiency for the least amount of turnover, thereby ensuring that the manager’s stock selection skill is more accurately reflected in the portfolio’s performance.
Since founding QUANTEC, Jason has developed the theoretical framework of Markowits and his successors into a practical set of tools for institutional fund managers. By his passionate pleas for a disciplined and logically coherent approach to portfolio management, he has acquired an international reputation as speaker, consultant and iconoclast.
He was educated at Oxford and London Universities, where he read Mathematics and Theoretical Physics. He has been an Honorary Lecturer at Lancaster University Management School, and a Visiting Professor at Tokyo University’s Center for Advanced Research in Finance. He is currently an Adjunct Professor at the Gabelli School of Business at Fordham University in New York, where he teaches a Masters in Quantitative Finance course on Equity Portfolio Management.
He was the founder and first Chairman of the London Quant Group, a not-for-profit organisation that arranges Seminars on the practical application of quantitative investment technology, and is also a Director of the Society of Quantitative Analysts in New York.