InvestmentNews takes advisers through the developments and innovations in technology that’ll change the way you do business today—and tomorrow.

Using technology to build the best portfolio

Calculating optimal portfolio allocations requires a combination of art and science, or truly, opinion and software

Jan 8, 2014 @ 12:01 am

By Sheryl Rowling

software, portfolio construction, efficient market theory
+ Zoom

I am one of the many advisers who apply modern portfolio theory in our investment strategy and use carefully crafted portfolio allocation models. For each risk level, a model will be constructed of specific percentages of asset classes based on so-called “efficient frontier” calculations designed to produce the greatest return.

That's all well and good, but how do we determine the efficient frontier or, stated more simply, how do we calculate our allocation models?

Using an optimizer does not produce black-and-white answers. If left unconstrained, or without guidelines, the software often recommends portfolios consisting of high percentages of a limited number of asset classes.

For example, one year, my optimizer recommended a portfolio containing all small-cap-value equities and emerging-markets bonds. Another time, the optimized portfolio was heavily weighted toward real estate. I certainly couldn't use models like these for my clients.

So we must constrain and define parameters — limiting real estate, small-cap-value and emerging-markets allocations (among others) — to create models that can be somewhat consistent over time and be palatable to our clients.

This demonstrates that calculating optimal portfolio allocations requires a combination of art and science, or truly, opinion and software. At my firm, we apply this combination approach to asset allocation. Although we never materially change our models (since we are not market timers or strategic allocators), we still consider the relative changes in correlations each year to make minor adjustments.

I've tried various optimizer programs. Over the years, I've used Morningstar EnCorr, Zephyr, Advisory World ICE and others. There are broad ranges of prices and functionality. It's difficult to find the “right” solution. I'd like to hear from you. How do you determine portfolio allocations and what software do you use?

Sheryl Rowling is chief executive of Total Rebalance Expert and principal at Rowling & Associates. She considers herself a non-techie user of technology.


What do you think?

View comments

Recommended for you

Featured Research

The 2015 InvestmentNews Adviser Technology Study

This in-depth study provides a blueprint for the industry, providing actionable information to advisers, along with the latest solutions to help them drive profitability, efficiency and growth for their firm.

Featured video


Mercer's Cara Williams: How to achieve gender parity in the financial advice industry

The financial advice industry can learn from companies and countries that are well on their way to achieving 50/50 gender parity, according to Cara Williams, global wealth leader for the multinational client group at Mercer.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

Brian Block's $4 million bonus was tied to a key metric at ARCP

Prosecution rests case in fraud trial against CFO of American Realty Capital Properties.

Edward Jones is winning the Google search war

Brokerage firm's digital marketing investment helps land it at the top of local and overall search engine results, report finds.

Voya's win in 401(k) fee suit involving Financial Engines bodes well for other record keepers

Fidelity, Aon Hewitt and Xerox HR Solutions are currently defending against similar fiduciary-breach claims.

Collective investment trusts getting more attention from 401(k) advisers

The funds are catching on due largely to lower costs and more product availability, but come with some inherent drawbacks.

Vanguard rides robo-advice wave to $65B in assets

Personal Advisor Services, four times the size of its closest competitor, combines digital and human touch.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print