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New Investment Vehicle For Do-It-Yourself Investors Wanting Performance

Portfolio123 - a quantitative screening/backtesting engine - is in the middle of a beta-launch for a new product called Ready-2-Go portfolios.

  • FEB. 23rd 2013 ADDITION: Portfolio123 has just today offered a new $49 per month plan. It is called Portfolio123 lite and lets you use all the tools including Ready-2-Go models but has simulation backtesting limited at 2 years, although screening/backtesting is still from 1999.

Right now there are few products for active investors that want to lower downside risk while increasing the likelihood of beating the market long-term. Some of the current contenders are:

  • Hedge-funds
  • Stock-picking analysts and associated funds
  • Quantitative ETFs

The Downside of Hedge-Funds

Each of the current options have their downsides. Perhaps it is easiest to pick on hedge-funds due to a lack of recent performance. Hedge-funds have a hard time rationalizing the huge fees, under-performance, lack of transparency, lock-up periods in addition to governmental restrictions allowing only 'accredited investors'. Mirroring these funds is pretty pointless unless hedge-funds themselves can prove themselves worthy of investment dollars.

The Downside of Active Funds (Stock-Picking)

Next we have active stock-pickers and their funds. The problem I have with stock-pickers is the lack of proof or statistical evidence backing up the person or fund. If you cannot clearly define their method or strategy, you have no idea whether they are just lucky or have true skill. And how do you define that skill if they trade from 'their gut'? Furthermore, it may take years or decades to accumulate enough evidence and trades to determine with any certainty that the stock-picker has been consistently skillful, but without assurance that he can continue to do so with changing economics.

The Downside of Large Publicly-Traded Quant Funds

There is a growing trend for strategic quantitative and back-tested ETFs but these also suffer from problems common to having too much money to invest:

  • Too many stocks per quantitative strategy (50 to 100)
  • Liquidity constraints (cannot easily buy small illiquid stocks in any quantity with frequent rebalancing without large friction cost)
  • Current strategies may be overly simplistic
  • Infrequent rebalancing on many active ETFs (quarterly) leads to lack of stock-specific and market-based timeliness

The Upside of a New Offering by Portfolio123

There is a new solution about to hit the market. Portfolio123 is releasing an alternative active-investment solution called Ready-2-Go portfolios.

Portfolio123 is a stock screening and backtesting platform that is free of survivorship and look-ahead bias. What this means is that you can place yourself back in the summer of 2003 and trade the markets exactly as they were at that point-in-time. For a reliable strategy-testing engine - this is vital.

The investment community now has access to decades of academic research - in addition to smart and creative individuals living in all parts of the world who have devised ingenious investing techniques. The motivating force behind Ready-2-Go portfolios is to give voice to these quantitative strategies and allow any investor to subscribe to that particular portfolio. Portfolio123 is a leader in portfolio software that allows developers create relative ranking systems which grade stocks based on a strategic theme, long/short portfolios, dynamic hedging rules, absolute or comparative rules, market-timing, cash management, numerous portfolio diversification techniques, fundamental and technical factors and the ability to design complex formulas. The only limitation is the model developer.

In the future, any member of Portfolio123 will be able to submit a strategy to be scrutinized and backtested by staff. Portfolio123 is well aware of the common pitfalls to novice developers such as over-optimization, using a universe of stocks with survivorship bias or simply having no underlying strategy - which provides the answer to why the portfolio should make money. Once a model is accepted, it will run on the Portfolio123 platform automatically and based on the programmed strategy. Developers will be able to set the price of a subscription in addition to the maximum amount of subscribers - which will allow for active smallcap and low liquidity strategies to be executed. Subscribers will be sent updates via e-mail or they can log-into the site.

Even before signing up for a model, users can view a wealth of statistics and charting data where the model has been rigorously backtested with real-world constraints for over a decade. Potential subscribers will be allowed to be a "lurker" where they can shadow a portfolio with updated e-mails, but where the actual holdings are hidden. Portfolio123 will encourage developers to keep fees low and will take a small percentage of the revenue to cover costs.

Some of the advantages current and upcoming are:

  • Tightly focused models (e.g. 10 stocks)
  • The ability to blend strategies and create your own fund with desired risk/reward characteristics
  • No management or performance fees
  • No lock-up periods
  • Highly transparent (although actual trading rules are hidden)
  • Ability to trade small or illiquid stocks
  • Automation through partnership with low-cost brokerage
  • Democratizing investment strategies and creating equal opportunity for developers no matter where they live or their economic upbringing

In a very true sense, investors will be able to create their own quantitative funds blended from 4 or 5 focused strategies with historical real-world simulations. Phase 1 is already in process with a select group of strategies such as SmallCap GARP (Growth At a Reasonable Price), Chaikin with Market Timing and Piotroski being available for free.

The questions remaining are these:

  1. how will investors respond?
  2. Will they see the advantage of creating their own funds based on backtested and sensible quantitative strategies?
  3. Will the process be easy enough to execute our will they prefer to pay management fees through a manager?
  4. Will this platform attract enough forward-thinking strategies willing to share their 'secret sauce' for subscription fees only?
  5. Might it usher in an investment revolution giving 'power to the people'?

One thing that Portfolio123 should be able to answer is whether the market is efficient where an investor cannot 'beat-the-market' without incurring higher risk, or whether the average investor simply does not have access to sophisticated enough tools to do so…yet.

This will be an interesting development to keep an eye on.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.