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Constructing a Portfolio that Successfully Manages Downside Risk. Annual Conference May 23, 2012. Jerry A. Miccolis , CFA ® , CFP ® , FCAS CIO, Brinton Eaton. Constructing a Portfolio that Successfully Manages Downside Risk. Constructing a Portfolio that Successfully Manages Downside Risk.

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constructing a portfolio that successfully manages downside risk

Constructing a Portfolio that Successfully Manages Downside Risk

Annual

Conference

May 23, 2012

Jerry A. Miccolis, CFA®, CFP®, FCAS

CIO, Brinton Eaton

constructing a portfolio that successfully manages downside risk2
Constructing a Portfolio that Successfully Manages Downside Risk

Juan Carlos Artigas

Global Head of Investment Research

World Gold Council

Company confidential

constructing a portfolio that successfully manages downside risk3
Constructing a Portfolio that Successfully Manages Downside Risk

Kenneth R. Solow, CFP®

Chief Investment Officer

Pinnacle Advisory Group

Company confidential

constructing a portfolio that successfully manages downside risk4
Constructing a Portfolio that Successfully Manages Downside Risk

Erick Goralski

Director, Global Markets, ICG Structured Investments

Deutsche Bank Securities, Inc.

Company confidential

modernizing mpt
Modernizing MPT
  • More realistic asset distributions
    • Non-normal/fat tails
  • More representative investment horizons
    • Multi-period/compound returns/risk drag
    • Rules-based rebalancing
  • More meaningful risk measures
    • Shortfall risk
    • Conditional VaR
  • More useful dependency measures
    • Correlations  copulas

Company confidential

to copulas
…to copulas

1

0.5

0

-1

-0.5

0

0.5

1

-0.5

-1

Company confidential

our sector rotation strategy is an example of daa
Our sector rotation strategy is an example of DAA
  • Stable-weighting
  • Exit/entry signaling
    • Trade-offs between stability and responsiveness
    • Three “momentum” algorithms
      • Each has its own strengths/ weaknesses
      • Rules that determine which algorithm to use at different times
      • Dynamically move between responsiveness and stability based on market characteristics
  • Filtering
    • To avoid too-frequent trading
  • Parameters optimized based on 1990-2007 data
    • Tested “out of sample” with 2008-2011 data

Company confidential

our three criteria for an effective buy and hold tail risk hedge
Our three criteria for an effective buy-and-hold tail risk hedge
  • Sudden appreciation in severe market downturns
    • “Severe” denoting sudden, substantial, unexpected decline in market value across most major asset classes, as in 4Q08 (i.e., when diversification doesn’t help)
    • Appreciation to a degree sufficient to meaningfully offset the decline
    • No “give-back” during market recovery!
  • Very low cost
    • Minimize diversion of funds from productive use
    • No sacrifice of upside portfolio potential!
  • Minimal disruption to portfolio
    • Maintain what works in vastly more likely markets
    • “Don’t throw the baby out with the bathwater!”

Company confidential

our criteria in a picture
Our criteria in a picture

Company confidential