Investment Advisor / Institutional Grade Model Portfolio Strategies

[inovestor]

When I first began my journey on P123 as Quantonomics in 2013, I participated in the crafting of eye-popping annualized returns but I realized overtime the audience for these models is very small. I work in the financial industry for more than 10 years and I am currently a portfolio manager at a small boutique firm. I believe it’s impossible for any portfolio management professional to invest in 99% designer models because they don’t meet the necessary requirements of actual investable products. Not because these models cannot generate strong returns (a couple of them do!), but for a myriad of reasons, the main ones coming to my mind are:

1. Scalability / Liquidity
Most cannot be scaled. It is one thing to have $1-5 million invested in a strategy, it is another to have over $100 million + of assets under management and be able to get in / out without moving the stocks.

2. No Market Timing
Market timers embedded in model portfolio strategies are the root of evil because it is difficult for potential investors to dissociate market timing returns from the ranking / fundamental rules returns.

3. Diversified Holdings
You would be hard pressed to find ETFs, mutual funds, pooled funds, etc. with less than 25 holdings. Most models on P123 are Top 5-10 holdings and would be considered portfolio complements at best.

4. Low portfolio Turnover
Low portfolio turnover is below 75%… I often see designers stating “low turnover” at >200%. If you manage money, you aren’t a speed boat that can turn on a dime. You have to think of yourself as a cruise ship.

5. Lack of transparency
Many models are unfortunately black boxes. I can understand the need to protect intellectual property but if one cannot even understand where the returns come from and how they are generated, it is problematic.

So far, I have these three strategies meeting investment advisors / institutional requirements. They are fact sheets but I have detailed presentations available as well for those interested:

US Large Cap Equity
Inovestor_Factor_Based_US_Large_Cap_Equity_Fact_Sheet_201708.pdf

International Equity
Inovestor_Factor_Based_International_Equity_Fact_Sheet_201708.pdf

Canadian Equity
Inovestor_StockPointer_Canadian_Equity_Fact_Sheet_201708.pdf

This one has an out of sample track record of almost 10 years! I didn’t create it but I am responsible for it. An interesting fact about this Canadian Equity Strategy is that it was released out of sample during the 2008 bear market without ever having been backtested! Thanks to P123, I was able to finally prototype the model in the first half of this year. An ETF tracking this quantitative strategy should be launched late November 2017 and listed on the Toronto Stock Exchange, I am excited about this ! I am wondering if other members created model portfolio strategies specifically aimed at investment advisors / institutionals and what results have you achieved?

[WalterW]

4. Low portfolio Turnover
   Low portfolio turnover is below 75%… I often see designers stating “low turnover” at >200%. If you manage money, you aren’t a speed boat that can turn on a dime. You have to think of yourself as a cruise ship.

I recently had a discussion with a hedge fund quant and her shop has no interest in low-turnover models. They wanted to see a model with many successful decision points. A long-term capital gains model I’ve been working on wasn’t appropriate for them. If it does well through incubation, I may offer it to individual investors here.

Walter

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[kumar]

inovestor,

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I believe it’s impossible for any portfolio management professional to invest in 99% designer models because they don’t meet the necessary requirements of actual investable products. Not because these models cannot generate strong returns (a couple of them do!)

Please, share what criterias you look to get 1% to 2% of filtered designer model. it will help to focus on long term growth model.

Thanks
Kumar

[Miro]

1. Scalability / Liquidity
   Most cannot be scaled. It is one thing to have $1-5 million invested in a strategy, it is another to have over $100 million + of assets under management and be able to get in / out without moving the stocks.

This is mostly a market cap issue. Small/Micro cap models have no capacity. This is a huge edge to individual investors who are brave enough to embrace the volatility of these tiny titans.

3. Diversified Holdings
   You would be hard pressed to find ETFs, mutual funds, pooled funds, etc. with less than 25 holdings. Most models on P123 are Top 5-10 holdings and would be considered portfolio complements at best.

There are about 1200 mutual funds which have outperformed SPY over the last 5 years. About 1% of them have less than 25 holdings. About 15% have less than 50 holdings.

Mutual funds have to decide whether they want to structure themselves as “concentrated” (with its own set of disclosures - usually sector specific funds) or “not concentrated” (with rules about how many big positions they can take). Almost all choose “not concentrated.”

4. Low portfolio Turnover
   Low portfolio turnover is below 75%… I often see designers stating “low turnover” at >200%. If you manage money, you aren’t a speed boat that can turn on a dime. You have to think of yourself as a cruise ship.

Tax efficiency is the issue here. You either make it a priority, or you embrace turnover.

5. Lack of transparency
   Many models are unfortunately black boxes. I can understand the need to protect intellectual property but if one cannot even understand where the returns come from and how they are generated, it is problematic.

“Black box paranoia” used to be a thing in the LTCM days. But modeling is more mainstream and accepted now.

[kumar]

1. with help of Mgerstein virtual class and his review on my system a year ago

2. AAII widely used market timing for the individual investor,
   i.e, sma(50)<sma(200) ---- death cross,
   sma(50)>sma(200)----- golden cross

3. AAII monthly meeting for last 3 years

4. AAII president presentation on value and growth investing

5. William O’Neil books, and his IBD50 is based on ranking system.
   inspiration IBD50 rank based system produce 18+% return over 20 years period.

6. Inspiration, rank system works for large masses:
   Zack ranking system produces 25+% annual return on around 200 stocks holdings for last 30+ years

and with my hard work and observation,
& this community comments and feedback periodically.

i came with following 20 stocks model.
variable transaction and Monday close price used for transaction.

the message is
if we put the required efforts.
P123 designer can produce comparable model as seasoned investment professionals with strong financial education background.

for individual investor, we want better alpha with reasonable number of stock holdings; So i have designed 10 stocks model subset of the
20 stocks version attachment.

S&P500-10 Value, Growth and Quality Stocks
https://www.portfolio123.com/app/r2g/summary?id=1495143

Thanks
Kumar

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[kumar]

inovestor,

When I first began my journey on P123 as Quantonomics in 2013, I participated in the crafting of eye-popping annualized returns but I realized overtime the audience for these models is very small.

https://www.portfolio123.com/app/r2g/summary?id=1063412
this model is under performed bench mark for last 3 years.

Individual investor at p123 complaining IBD50 and Zack rank performance not includes transaction price and they may calculate (day’s low price for buy and day’s high price for sell).

Here, P123 everything is transparent except the system code.

if any individual model performed 20% avg a year with 20 stocks holdings with reasonable liquidity for 5 years in a row, believe, p123 will get more audience thru forbes and barrons.

Thanks
Kumar

[WalterW]

I believe it’s impossible for any portfolio management professional to invest in 99% designer models because …

Should financial professionals even be using DMs?

My models were made for personal use within an IRA. Later, I opened some of them to subscribers - but individual subscribers. I have no interest in portfolio managers using them for their client base. At least not if they’re only opening one subscription per model.

Since Standard & Poors requires P123 to identify professional users, can that be used to offer DMs at two subscription levels; individual and professional?

Walter

[hemmerling]

Yes, these are definitely 2 separate markets. I have built for both. It would really be nice if we had a marketplace where we could advertise our models to institutional clients with online tear sheets or quick summaries. My experience is that you have a lot of customization work so having a ‘for rent’ model that is locked down in P123 is not appropriate for institutional clients.

The sort of stuff I built for a client (but didn’t get used) and still have kicking around as my IP relates to hedged or market-neutral models for the Russell 1000. The funny thing was that we couldn’t fully model in ClariFI the stuff we were doing in P123. Integrating rules and ranks in ClariFI at the time was virtually impossible so the best models were sidelined. 4 years out of sample performance is pretty good. It is 50 positions long and 50 positions short. But only 50% hedged - not market neutral.

Edit: there are no rules associated with the screenshot below. Just the ranking system with a bit of tolerance to slow down turnover.

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[mbclark]

Just curious, what are your average short borrow fees on the short side of that book? I always find my best long/short models have shorts that are expensive to borrow.

[inovestor]

I recently had a discussion with a hedge fund quant and her shop has no interest in low-turnover models. They wanted to see a model with many successful decision points.

@wwasilev
Yeah well it depends of which type of investment firm. Hedge funds are about the only ones who would go for higher portfolio turnover. Also hedge funds are known to have exceptionally concentrated positions. For example Pershing Square with Valeant… Losing 4B when managing 12B…

Investment Advisors prefer the lowest possible portfolio turnovers because they want to spend more time doing “asset gathering” than portfolio management. If rebalancing is too frequent, it really becomes more complicated to communicate changes to all the individual clients they cover.

Most other financial products like pooled funds, mutual funds, ETFs, etc. are mostly looking for low portfolio turnover (less than 75%) in well diversified holdings (at least 25 names). As Miro wrote, less than 1% mutual funds have less than 25 names. Even at 25 names you are still called “concentrated”…

Please, share what criterias you look to get 1% to 2% of filtered designer model.

@ Kumar
I already stated them in my main post. Take your model and 1) reduce your portfolio turnover below 75%, 2) remove ALL market timing from your model and if you can 3) increase to 25 stocks. Do these changes and post to see what kind of results you get. My US Small Cap model I made 4 years ago is irrelevant in this thread as it’s more geared toward individual investors, like your models are.

Should financial professionals even be using DMs?

@ wwasilev
No but I think if people build such type of models it would help for the overall DM reputation. Since a bunch of people got burned following gimmicky “pickle” models and alike couple years ago, I feel P123 subscribers trust DMs less nowadays.

[hemmerling]

We had issues locating shares and borrowing costs on our Russell 2000 model as well as slippage concerns despite 100 positions long and short. It was running over 400 million. That was one reason why I developed this Russell 1000 system for more liquidity and ease of borrowing. With 50 mid to large cap stocks there is less concern…and it can be bumped up to 75 or 100 positions per side if need be.

But in R2K and smallcap stocks, a market neutral model is very tricky indeed.

[WalterW]

No but I think if people build such type of models it would help for the overall DM reputation. Since a bunch of people got burned following gimmicky “pickle” models and alike couple years ago, I feel P123 subscribers trust DMs less nowadays.

I’m all for increasing DM reputation and P123 has taken some steps to prevent hot-model offerings - even though those steps are sometimes being circumvented. However, I don’t see how designing models geared for investment advisors / institutionals would help. I believe an individual investor can do much better with a P123 book of carefully curated models. I see P123 (and DMs) as focused on individual investors and I hope it stays that way.

Best,
Walter

[yuvaltaylor]

Here’s a model. It needs some serious refinement—I’m sure I can modify it so that the drawdowns aren’t as bad—but it gets consistently above-average returns and it satisfies your criteria:

• minimum liquidity: median daily dollar volume over the past 3 months of over $3 million
• no market timing
• 25 holdings (I could do more if you’d like)
• turnover around 75% per year
• high transparency—very simple ranking-based buy and sell rules, 30-factor ranking system that uses mostly quality, value, growth, sentiment, and size criteria (i.e. almost no technical stuff)

What kind of monthly fee would such a designer model command?

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[kumar]

I agree, I can’t compete with professional money managers on turnover and quality of stocks selection.

My question is whether my model can perform as good as professionals mutual funds with less number of stocks. My ideas is sync with their decades of profitable winning system ?

only known to high networth individuals decades ago, with help of P123, We able to design one.

any audience in p123 for this kind of models ?

comments and feedbacks are appreciated.

Thanks
Kumar

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[inovestor]

I don’t see how designing models geared for investment advisors / institutionals would help.

@wwasilev
They help raise the portfolio management standards for about everything. Performance presentation is another example. Why do you think we are getting extended ETFs on P123 lately? It’s because professionals requested these changes so they can get better benchmarks on their model portfolios. This of course benefits everyone with higher precision tools.

What kind of monthly fee would such a designer model command?

@yuvaltaylor
Assuming you would rework for a bunch of hours the weakness of your model, I would say the equivalent of 10-20 basis points of their AUM if its an institutional or a couple hundred dollars / month if its an advisor depending on the level of service provided but it will require you to hustle a bunch of investment advisors / institutionals. In other words, there is a lot of sales / marketing / persuasion / some out of sample track record / leap of faith before they decide to subscribe to your model portfolio.

Comments and feedbacks are appreciated.

I honestly think you are on a good start. How about you change your rebalance frequency from weekly to quarterly and maybe your portfolio turnover will become acceptable? It will most likely cost you annualized return performance, but how much performance are you sacrificing in exchange of lower turnover: Post the new stats with the quarterly / 3 month rebalance change.

[kumar]

i have a full-time job in IT and have limited time for this kind of low return model;

This posted performance is for without any changes in ranking system and without much testing for improvement.

Believe, i can improve this system, if i work.
I don’t know, it is worth my time to work on this direction ?

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with 10 stocks model, i can show 40% avg annual performance in DM, even returns 20% avg annual performance in out of sample, the model is successful. I can grow my personnel account better than average of top 10 best mutual fund around 15%.

Mgerstein/Inovestor,

Please, give me comment and suggestion.

Thanks
kumar

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[kumar]

Inovestor/Hemmerling,

my 2 cents.

Why you are not interested in DM space with 10 and 20 stocks and high liquidity model.

as you have already working as full-time investment professional, it is going to be fun and encourage P123 community to grow and prosper on your spare time.

It will build trust on DM and designer can learn from your models; eventually you will get better idea from this community and young,experienced DM designers.

======================
People love and respect investment advisor/investment manager who walk the talk like P123’s Mgerstein does.

If your DM performs good in p123, eventually,
you can refer your model to your client for real time performance.

Thanks
Kumar

[Miro]

Kumar

Do you have any more models that might be appropriate for institutional investors?

[inovestor]

Why you are not interested in DM space with 10 and 20 stocks and high liquidity model.

Because it is easier for investment advisors / institutional investors to sell a single cohesive model portfolio strategy following the exact same investment philosophy / investment process than to bundle Strategy X 10 stocks + Strategy Y 10 stocks + Strategy Z 5 stocks = Strategy XYZ 25 stocks. If you are a provider of a Top 5 / Top 10, you carry too much specific risk. I used to have a Canadian Equity 10 stocks Strategy with amazing track record for nearly 2 years until April 2017 because it had Home Capital Group (HCG:CN). 2 years of alpha destroyed by a single stock! I also had a 25 stocks version of the same Strategy and because it is more diversified, it outperforms the S&P/TSX YTD despite owning this bomb. This story shows why Top 5 / Top 10 are bad…

I don’t know if it is worth my time to work on this direction ?

You are free to do whatever you want. I made this post to see who else is working in this direction. Here is an apple to apple comparison with your model. Kumar, what is interesting is that mine is doing better than yours when you are doing okay but your model does better than mine on the years mine is doing okay:

[hemmerling]

Kumar:
The feeling that I get is that there is not a lot of institutional P123 users who browse DMs and are willing to commission a model costing $25,000 to $50,000 to own it outright. I think there are a lot more who follow a few models at $10 - $50 per month to generate stock picking ideas for their firm. Maybe I am wrong. It is a lot of work to develop a batch of institutional grade models that only collect dust.

I think P123 could create an Institutional marketplace like Elance of yesteryear where Institutions say what they want and their price range on a job board, we submit model performance and a quick summary for their examination, they narrow down their selection and buy/rent/lease the model which is placed in their private account. P123 takes a percentage of the transaction and all is good.

Kurtis