Presented By: Jason MacQueen, Founder, Smart Portfolio Strategies
Active portfolio management essentially consists of two steps: stock selection and portfolio construction. Many managers spend most of their time on stock selection, and then deal with portfolio construction by following some simple heuristic, such as equal-weighting or capitalization-weighting. Most factor ETFs, for example, use one of these methods.
Unfortunately, this is virtually guaranteed to result in inefficient portfolios that make no attempt to trade-off expected return against risk, and which are therefore likely to have significant unintended bets. The manager’s stock selection skill can easily be dominated by the returns to these unintended bets.
In this presentation we use a simple stock selection rule (like those used to create Style Factor ETFs) and test different methods of portfolio construction. These will include equal-weighting, capitalization-weighting, attribute-weighting, inverse volatility, risk parity and Markowitz optimization.
The talk will also present a modified version of standard Markowitz optimization, which is well-known to be quite problematic in practice. Smart Portfolio Optimization identifies the most inefficient holdings in an existing portfolio and only allows a limited amount of trading in those stocks; the purpose is to gain a significant improvement in overall efficiency without incurring too many transaction costs.
Each of the strategies is rebalanced quarterly from the end of 2005 to the present. Since the stock selection is always the same, the differences in performance and turnover are due entirely to the different methods of portfolio construction. You may be surprised by the results!
Jason is a pioneer in the development 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 his 40-year career, Jason developed the theoretical framework of Markowitz 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.
In 1980, Jason founded QUANTEC, the first firm to develop risk models for equity markets outside the USA, for all developed and most emerging markets. In 1984, the company launched the first global asset allocation model, including currency hedging overlays and the first use of reverse optimizations for efficient portfolio rebalancing. In the early 1990s QUANTEC developed the first global risk model, as well as a global stock selection model.
In the late 1990s Jason and his colleagues developed a statistical risk model-based technique for the American Stock Exchange, enabling it to offer ETFs on non-transparent actively managed mutual funds. This technology can also be used by pension funds and other asset owners to manage overall portfolio risks without having full transparency from their external managers.
In 2003, he co-founded R-Squared Risk Management to develop Custom Hybrid Risk Models for institutional investors to enable more efficient management of their portfolios. R-Squared developed a unique set of XRD (Cross Reference Day) equity risk models covering different geographies. These models are based on four or five sample sets of data. Each sample is then used to build an SRD (Single Reference Day) model. While each set of SRD models is similar to others, they are each affected by particular idiosyncrasies in their sample data set. By combining the SRD models into a single XRD model, some of these idiosyncratic effects are diversified away, with the result that XRD models are more stable and more robust than any individual SRD model, and will produce more accurate forecasts of portfolio risk characteristics.
Jason and his colleagues at R-Squared also developed the Global Equity risk model used in FactSet’s Multi-Asset Class (MAC) product. In December 2014, R-Squared was acquired by Northfield. Jason became the Director of Research and focused on developing a second-generation Global Equity model for FactSet’s MAC product, which included additional style factors, regional sector factors and other enhancements.
Jason was educated at Oxford and London Universities, where he read Mathematics and Theoretical Physics. He was the founder and first Chairman of the London Quant Group, a not-for-profit organization established in 2007 to arrange Seminars on the practical application of quantitative investment technology; these seminars are the successor to the QUANTEC Investment Seminars, first started in 1986, and still held at Oxford or Cambridge Universities.
Jason 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 also a Director of the Society of Quantitative Analysis.