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Robert Okada, CFA  

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  • Applying Risk Budgeting To Online Portfolio Management: A Survey [View article]
    Hi Simon,
    Thanks for your comments. The metrics of your portfolio speak for itself and clearly show an imbalance; heavy in duration and little to no credit exposure to enhance yield. I believe most advisors would agree that given today's environment, exposing individual investors to a high dose of interest rate risk with no real (inflation-adjusted) yield to protect against rising rates is imprudent.

    NEPC Consulting has done some really good work in asset allocation and risk management; I believe your software engineers would find good value in their research.

    I think you and other online advisors have a real opportunity to expand the boundaries of modern portfolio concepts rather than simply recycling current methodologies. Push, create, and innovate - take a chance!

    All the best in your quest.

    Regards,

    Robert Okada, CFA
    Jun 4, 2014. 02:07 PM | Likes Like |Link to Comment
  • Applying Risk Budgeting To Online Portfolio Management: A Survey [View article]
    Hi Helen, Thanks for your comment and questions. Sometimes, some securities have a more defined inflation or currency component, such as a treasury-inflation-pro... (OTC:TIPS) or foreign T-bill, where you can more efficiently attribute to a particular risk component. Consider the following two theoretical examples:

    Example 1:
    TIPS issued at par/face value: $1,000
    Coupon rate: 2%
    Annual Inflation: 1.5%
    Year over Year, the Principal feature of the security increases by: $1000 x 1.015 = $1,015
    Year over Year, the Coupon (semi-annual payment) component increases from:
    $1,000 x 2% = $20 to: $1,015 x 2% = $30
    So, at year-end the price of the bond, assuming no interest rate changes, would theoretically be at $101.5 (or $1,015), and the 1.5% price change would be attributed to inflation. Any price difference from $101.5 would be attributed to changes in interest rates and possibly credit quality.

    Example 2:
    New Zealand Dollar One-year T-bill issued at $96.75 or $967.50 per $1,000 face value
    Interest Rate: 3.25%
    Exchange rate: NZ$/US$: 0.84
    At the end of one year, the exchange rate is: NZ$/US$: 0.88
    Initial investment: 0.84 x $96.75 = $81.27; at maturity in one year: 0.88 x $100 = $88
    Return: $88 – $81.27 = $6.73 / $81.27 = 8.28% (annualized return)
    So, 8.28% less 3.25% = 5.03% is attributable to the currency.

    These two examples highlight securities where the risk factors are fairly defined. Conversely, with an REIT or commodity fund, for example, the risk factors are multiple by nature, and because of that, are more difficult to quantify. With any fund, I would encourage you to contact the fund advisor and ask a savvier customer service agent to provide you with an attribution analysis for each of the funds you hold. If they don’t have one readily available, they can easily make one available to you at no cost, just as they do with institutional investors.

    I hope these examples are helpful, and if you have any further questions, please feel free to contact me via my company or SA email link.

    Best regards, Robert
    Mar 13, 2014. 05:42 PM | Likes Like |Link to Comment
  • Applying Risk Budgeting To Online Portfolio Management: A Survey [View article]
    Thanks for your comments John. I think if most investors applied this risk-based methodology to their portfolios, they would likely find similar imbalances, just as you did.

    I mentioned in the article an unconstrained, absolute-return oriented strategy - Osterweis Strategic Income (OSTIX). If you break down the portfolio, you'll find Carl Kaufman's current strategy aligned with the HY 1-3 Index, where he is focused on the currently favorable cash flow yield to duration relationship in short-term non-IG bonds.
    Mar 1, 2014. 10:28 AM | Likes Like |Link to Comment
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