TechTalk

TechTalkblog

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

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.

0
Comments

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

INTV

Advisers beware: tax law has unintended consequences

Commission accounts could be preferable for some clients, and advisers could be incentivized to move from employee broker-dealers to independent channels.

Recommended Video

Path to growth

Latest news & opinion

Relying on trainees, Merrill Lynch boosts adviser headcount in 2017

Questions remain about long-term effectiveness of wirehouse's move away from recruiting experienced brokers.

Supreme Court review of SEC judges could roil pending cases

But long-term, the agency may get around questions of constitutionality by changing the way it brings on administrative law judges.

Lightyear Capital takes 50% stake in $9 billion HPM Partners

Private equity backing could fuel acquisitions by the large RIA.

Tax reform: 7 essential strategies for financial advisers

While advisers face the difficult task of analyzing the law's impact, they will also have a significant opportunity to prove their value by implementing money-saving strategies for clients as well as their own businesses.

Tax law: Everything advisers need to know about the pass-through provision

The provision is tricky, but could provide advisers and business-owner clients with sizable tax savings.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print