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portfolio structure/design

2020 has been a challenging year in many ways and as we are comingcloser to the end of the year and as we are approaching the election I wantedto reiterate why you are invested the way you are and how your portfolio isbuilt to withstand volatility and tough economic times.

Ourinvestment philosophy, which is based on observed evidence and extensiveresearch from Nobel prize winning academics, is that no one truly can predictwhat will happen in the future and only unknowable and random events movemarket prices going forward. This is more commonly known as the EfficientMarket Hypothesis.

Sinceno one knows where the markets are going to end up tomorrow, next week, nextyear, or even over the next 5 years there really is just one way to moveforward and that is to have an investment portfolio that is fully diversifiedglobally.

Asone of our clients with a Matson Money portfolio your investments are stretchedall over the financial markets and the globe. Your investment portfolio isinvested in more than 45 different countries with exposure to over 18,000unique security holdings and this is the case no matter the size of yourpersonal portfolio.

45countries where portfolio is invested

AustraliaAustria Belgium Bermuda Canada Denmark Finland France Germany Greece Hong KongIreland Brazil Chile China Colombia Czech Republic Egypt Hungary India IndonesiaIsrael Malaysia Italy Japan Netherlands New Zealand Norway Portugal SingaporeSpain Sweden Switzerland United Kingdom United States Mexico Peru PhilippinesPoland Russia South Africa South Korea Taiwan Thailand Turkey

 

Thisincomparable level of diversification allows the portfolio to be structured sothat it can benefit from market opportunities all over the world. Choosing adiversified and structured strategy and staying with its long term can havegreat impact on the long-term financial health of an investor’s portfolio.Chasing performance through buying and selling is a chancy game andhistorically speaking, it may reduce an investor’s real return over time.

Understandingyour portfolio is important and understanding the risk associated with yourportfolio is necessary. Your time horizon, goal of the invested money and yourunique risk tolerance plays a role in deciding the specific mix of equities vsbonds. If you need to review where you have your mix, please schedule meetingwith us.

 

Yourinvestments get rebalanced on a quarterly basis to make certain that theallocations stay in line with the portfolio objective. Asset classes that havebeen surging will be rebalanced down and asset classes or countries that havenot performed well will be bought. This assures to a degree that your portfoliobuys low and sells high and makes sure that the integrity of the portfolio isalways maintained.

Studiesshow that more than 90% of a portfolio return comes from asset allocation andonly about 4% comes from stock selection (the rest is from other factors and timing)*

Assetallocation based on diversification, rather than market predictions, is a muchhealthier way to pursue opportunity for successful long-term investing. Insimple terms: What mix of asset classes is inside of your portfolio? 

Theimportance of asset allocation validates that market timing and stock selectiondo not add any real significant value to and investment portfolios returns. So,with that knowledge you do not need to worry about the individual stocks youhave inside your portfolio.  Instead, you should understand how each typeof equity is represented in your portfolio and how your investments worktogether.

 

Summaryof Academic Principles on which the portfolios are built and maintained. 

Free Markets Work

Modern Portfolio Theory

The Three-Factor Model 

 

Thefirst principle is that Free Markets Work. This was really first put intocontext by Eugen Fame in 1965. In his Ph.D. dissertation Eugene Fama wrote “Inan efficient market at any point in time the actual price of a security will bea good estimate of its intrinsic value.”

 

The2nd principle is “Modern Portfolio Theory”  

Thisis developed based on the concepts of Markowitz, Sharpe and Miller. ModernPortfolio Theory analyzes portfolio performance based on risk and return. Thetheory of risk and return won them the Nobel Prize. Based on their research andevidence correlation is the foundation of diversification and can help youachieve higher returns with less volatility.

Correlationis really the relationship between two investments and Dr. Markowitz measuredthe probability of asset categories moving dissimilarly and found that It ispossible to have two assets that appear fairly volatile individually but whenthey are combined in a portfolio actually can reduce volatility and increasethe potential rate of return.

 

 

The3rd academic principle on which Matson’s Free Market Portfolio Theory is basedis the Three-Factor Model.

Thismodel was developed in 1990 by Kenneth R. French of Yale University and EugeneFama.  They found out through their academic research which sources ofrisk the market systematically rewards with higher returns.  The factorsthat they found are: 

TheMarket Factor

TheSize Factor

The“Value”Factor

 

TheMarket factor risk premium is the difference between the expected return of themarket vs the risk-free rate. It delivers an investor with an expected higherreturn as compensation for the additional volatility that the market has.

 

Thesize factor premium is in simple terms the return that smaller companiesproduce compared to larger companies.

Itmeasures the historic additional return that small cap companies create over largecap companies.

Thebasis behind this factor is that over longer term smaller companies tend tohave higher returns than larger cap companies.

 

Thevalue factor premium is represented through the spread in returns betweencompanies with high book to market value vs companies that have low book tomarket ratio. This value factor historically shows that over longer period oftime value companies ( high book to value ratio) tend to produce higher returnsvs growth companies (low book to value ratio)

 

Brinson,GaryP., L. Randolf Hood, and Gilbert L. Beebower. ‘Determinants of PortfolioPerformance.’ Financial AnalystsJournal.  January-February 1995.  

*https://blogs.cfainstitute.org/investor/2012/02/16/setting-the-record-straight-on-asset-allocation/

“RANDOMWALKSIN STOCK MARKET PRICES,” FINANCIAL ANALYSTS JOURNAL, SEPTEMBER/OCTOBER1965

Fama,Eugene F. and Kenneth R. French. “A Five-Factor Asset PricingModel”.  Booth School ofBusiness, University of Chicago (Fama) andAmos Tuck School of BusinessDartmouth College (French).  March 2014. Print.  [Expansion ofthe 3 factor model]

"Diversificationandasset allocation strategies do not assure profit or protect against loss.Pastperformance is no guarantee of future results. Investing involvesrisk.Depending on the types of investments, there may be varying degrees ofrisk. Investorsshould be prepared to bear loss, including total loss ofprincipal

 

By
Jan Axel Tribler
,
on
October 30, 2020
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