I’m a huge fan of hard-core academics that produce incredible research, and yet, very few are familiar with their research. I call these folks, “undiscovered gems.”
One might ask why undiscovered gems exist. On one hand, if a researcher produces incredible research, they should be widely recognized. However, this logical construct relies on an assumption: good researchers are good at sharing their work beyond their niche peer group in the ivory tower.
The Talas Turkey Value Fund returned 9.5% net for the first quarter on a concentrated portfolio in which 93% of its capital is invested in 14 holdings. The MSCI Turkey Index returned 13.1% for the first quarter, while the MSCI All-Country ex-USA was down 5.4%. Background of the Talas Turkey Value Fund Since its inception Read More
At Alpha Architect we try and fix this situation. We consistently read research and share it with our large community, which extends well beyond the readership of esoteric top-tier academic finance journals.
In this post we highlight research from one of my favorite researchers, Victor DeMiguel.
Professor DeMiguel, is relatively unknown among the practitioner community, and even among finance departments.(1) In fact, I had never heard his name until I stumbled across his website 5 or 6 years ago. Turns out Victor isn’t a finance professor — he’s a management science and operations professor!
Of course, asset allocation is really less of a finance problem and more of an optimization problem. So it makes sense that someone outside of pure finance would write some really interesting papers.
Anyway, I am indebted to Prof. DeMiguel and I have learned an incredible amount on tactical asset allocation from reading his work. We have discussed his incredible paper (alongside his co-authors Lorenzo Garlappi and Raman Uppal who are great researchers as well!) that highlights the incredible robustness associated with dead simple equal-weight, “1/N,” portfolios.
Perhaps his greatest learning device isn’t a paper, but a presentation he has on the history of asset allocation research and the avenues for the research vein in the future.
Here is the link to the presentation, which starts with a great introduction slide (pictured below)
I highly recommend all readers spend some time on the presentation. Particularly towards the end. There is a discussion of various issues in portfolio optimization and the quest to beat the infamous “1/N” portfolio:
- Estimate a better covariance matrix
- Estimate a better expected returns
- Identify better constraints
Tactical Asset Allocation
So far all the whiz bang research doesn’t seem to provide crystal clear evidence that 1/N can be beat. In fact, we still recommend that investors beware of geeks bearing formulas and focus on simple trend-following rules if they choose to extend beyond 1/N.
Go forth and learn new things!
Note, Victor’s coauthors are also awesome. For example, here is a similar presentation from Raman Uppal on asset allocation.
Note: This site provides no information on our value investing ETFs or our momentum investing ETFs. Please refer to this site.
Join thousands of other readers and subscribe to our blog.
Please remember that past performance is not an indicator of future results. Please read our full disclaimer. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of Alpha Architect, its affiliates or its employees. This material has been provided to you solely for information and educational purposes and does not constitute an offer or solicitation of an offer or any advice or recommendation to purchase any securities or other financial instruments and may not be construed as such. The factual information set forth herein has been obtained or derived from sources believed by the author and Alpha Architect to be reliable but it is not necessarily all-inclusive and is not guaranteed as to its accuracy and is not to be regarded as a representation or warranty, express or implied, as to the information’s accuracy or completeness, nor should the attached information serve as the basis of any investment decision. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Alpha Architect.
- A good friend of mine who is tenured at a top 10 business school did not know of Victor DeMiguel.
Article by Wesley R. Gray, Ph.D. – Alpha Architect