Allocating for Alpha

Allocating for Alpha is our answer to the problems created by typical question-based asset allocation. While we use some of the typical inputs like your goals, risk tolerance, and age to establish your strategy, we do it in the context of a deep and full understanding of current economic and market conditions as well as an expectation for asset price movements in the future. That knowledge and understanding allows us to over-weight and under-weight asset classes, sectors, and industries according to our future expectations, and our management is dynamic on a daily basis.

What Is It? How Is It Different? Is There An Example Of Importance?


What Is It?

Allocating for Alpha is a portfolio construction process that builds a security allocation by not requiring exposure to asset classes, industries, or sectors that are expected to under-perform in the economic and market circumstances we are experiencing now and expect in the future. We don’t expose your assets just to check an allocation box.


How Is It Different?

Allocating for Alpha is different from traditional asset allocation because it allows an advisor to modify the recommended allocation of traditional modeling to accommodate the advisor’s understanding and belief set regarding the upcoming economic/market conditions. Traditional Modern Portfolio Theory allocation models are static and, generally, established or modified just once per year. Allocating for Alpha is a dynamic process that is implemented as often as daily.


Is There An Example Of Importance?

One of the ways MPT can fail an investor is by relying too heavily on past performance of asset classes as a basis for future allocation. A glaring example is in the use of bonds to reduce volatility. For more than three decades prior to 2021 using bonds to dampen volatility was a winner because for nearly that entire time general market interest rates were declining. Most bond investors know that bond values and interest rates act opposite one another so, as interest rates were declining, almost any bond purchased to reduce volatility also provided additional capital gain returns not normally associated with bonds.

These days there is substantial talk and fear about inflation and rising interest rates not seen in decades. So, while bonds do still provide dampened volatility, it’s much less likely that investors using bonds for that purpose will also enjoy the additional returns provided as rates fell over the last decades. In fact, if the expected higher interest rates do materialize, it’s more likely today that investors will pay a heavy price for lower bond market volatility to which they expose their portfolios.

In other words, past performance really isn’t a reasonable basis to invest in bonds today even as most MPT allocations expose a considerable portion of investors’ money to that market to reduce overall volatility.