Mer update march-2017

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A Two Stage Marginal Efficiency of Investment(MEI) and Marginal Efficiency of Return (MER) Analysis to maximize the selection of an Optimum Investment Portfolio that will beat the S&P 500.A Two Stage Marginal Efficiency of Investment(MEI) and Marginal Efficiency of Return (MER) Analysis to maximize the selection of an Optimum Investment Portfolio that will beat the S&P 500.

Show me The Money!Show me The Money!A Stochastic Optimization for Portfolio A Stochastic Optimization for Portfolio

Selection and Allocation Selection and Allocation 3/2017 Update.3/2017 Update.

Prepared by

Gary CrosbieMarch 2017March 2017

Part-3- An Update of June 2016 Analysis

This paper Updates the previous work done completed in Nov 2013 and This paper Updates the previous work done completed in Nov 2013 and June of 2016 on the optimum portfolio selection process(attached) by June of 2016 on the optimum portfolio selection process(attached) by evaluating three propositionsevaluating three propositions::

Proposition 1 -Proposition 1 - Marginal Efficiency of Investment- MEIMarginal Efficiency of Investment- MEI– Identify the model portfolio that contains the optimum LC, MC, SC ,Fixed Income Identify the model portfolio that contains the optimum LC, MC, SC ,Fixed Income

investments . investments . Proposition 2 Proposition 2 - - Marginal Efficiency of Revenue-(MER) Marginal Efficiency of Revenue-(MER)

– Given the identification of the optimum specific Investments (LC,MC,SC) in Proposition Given the identification of the optimum specific Investments (LC,MC,SC) in Proposition 1..How do you decide on the optimum allocation of your Investment dollars across 1..How do you decide on the optimum allocation of your Investment dollars across those equity selections(LC,MC,SC) e.g. You have decided based on your risk tolerance those equity selections(LC,MC,SC) e.g. You have decided based on your risk tolerance an Investment allocation of 60% Equities and 40% Fixed Income (Bonds). How do you an Investment allocation of 60% Equities and 40% Fixed Income (Bonds). How do you decide how to allocate the optimum equity selections derived in Proposition 1- across decide how to allocate the optimum equity selections derived in Proposition 1- across the 60 % of your total equity the 60 % of your total equity calculationcalculation

Proposition 3 Proposition 3 - - Comparative Analysis Comparative Analysis – From Proposition 1&2 above we now have an optimum portfolio that we can compare and

contrast with the baseline portfolio containing the S&P 500 And a Bond Index fund(LAG)

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Abstract: An Abstract: An UpdateUpdate

This is an Updated Abstract of the work done in June of 2016.This is an Updated Abstract of the work done in June of 2016.For more detail on process an analytics review the attached Document.For more detail on process an analytics review the attached Document.

Proposition 1 Proposition 1 -- Marginal Efficiency of Investment- MEI-Marginal Efficiency of Investment- MEI- SEE Ghant Chart- Proposition-1SEE Ghant Chart- Proposition-1

– Identify the model portfolio that contains the optimum LC, MC, SC ,Fixed Income Identify the model portfolio that contains the optimum LC, MC, SC ,Fixed Income investments . investments .

– The optimum Portfolio contains the following:The optimum Portfolio contains the following:

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Abstract: An UpdateAbstract: An Update

StyleStyle InvestmentInvestmentPowerPower

CoefficientCoefficient Comparative IndexComparative IndexLarge Cap 1-Dodge & Cox LC Income-DODGX

2- Large Cap Blend ETF-JKD11.6511.28

Vanguard Equity Income=VFINX

Mid Cap 1- Champlain MC Adv-CIPMX2- Vanguard MC Index-- VMVAX

11.3911.16


Small Cap 1-Maiirs & Power MSCFX2- Small Cap Bend-ETF-IJR

10.169.74


Fixed Income 1-Dodge & Cox Income Bond-DODIX2- Fidelity New Markets-FNMIX

9.449.06

SPDR Bond Index-LAG

lc

MEI/MER Ghant Chart

How to Select Optimum Investments

Select Highest Power Coefficient- See Exhibit -1

Large Cap

Mid Cap Small Cap

MEI Power CoeffIcient Calc Algorithum- Page

Morningstar Data base Pull LC, MC SC Funds from Morningstar Data Base

Power Coef = a(1Gr)+b(3 Gr)+c(5 GR) x α (d*Є )+(e* β)+ (F*σ)

Calculate Marginal Efficiency of Investment……MEI

Mairs & Power-MSCFX

Proposition-1

Dodge & Cox LC Income- DODGX

Champlain MC Adv-CIPMX

Dodge & Cox Income Bond- DODIGX

Β= Beta for the investment indicating Β= Beta for the investment indicating correlation over time with the general correlation over time with the general marketmarket

σ = Standard Deviationσ = Standard Deviation α= Measure of performance relative α= Measure of performance relative

to index of equivalent investments. to index of equivalent investments.

Fixed Income

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MUTUAL Fund Power Coefficient Analysis LARGE CAP FUND MEI-Power Coefficient Analysis

Summary- Funds GREATER THAN the S&P 500Power Rating Rating Fund

11.65 Gold Dodge and Cox Large Cap Income-DODGX

11.28 Gold Large cap- Blend-ETF-JKD

10.68 Gold Primecap Odessey-Large Cap-POSKX

10.35 Silver S & P 500 -VFINX

MUTUAL Fund Power Coefficient Analysis MID CAP FUND MEI-Power Coefficient Analysis

Summary- Funds GREATER THAN the S&P 500

Power Rating Rating Fund

11.39 Gold Champlain MC Adv-CIPMX

11.16 Gold Vanguard Mid-Cap Value Index -VMVAX

10.98 Silver Midcap-Value-ETF-IWS

10.74 Gold Vanguard Mid-Cap Value Index -VMVIX

10.35 S & P 500 -VFINX

SECTOR- Power Coefficient AnalysisSummary- Sector ETF Fund Ratings >S&P 500

Power Rating SECTOR

12.05 S&P - Finances-XLF

11.60 S&P -Technology-XLK

10.89 S&P-Industrials-XLI

10.35 S & P 500 -VFINX

Exhibit-1Exhibit-1Results: MEI Proposition 1: Results: MEI Proposition 1:

MUTUAL Fund Power Coefficient AnalysisSMALL CAP FUND MEI-Power Coefficient Analysis

Summary- Funds GREATER THAN the S&P 500 Power Rating Rating Fund

10.35 S & P 500 -VFINX10.16 Silver Mairs & Power -MSCFX

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Exhibit-1Exhibit-1Results: MEI Proposition 1: Results: MEI Proposition 1:

Results: MEI Power Coefficients > S&P 500Results: MEI Power Coefficients > S&P 500

STYLE -ETF.. Power Coefficient AnalysisSummary- LC, MC,SC, Value, Blend, Growth

Power Rating…...Ranked High to low

11.28 Large cap- Blend-ETF-JKD

10.98 Midcap-Value-ETF-IWS

10.35 S & P 500 -VFINX9.62 Midcap-Blend-ETF-IWR

9.33 Large cap-Growth-ETF-IWF

9.18 Large cap- Value-ETF-JKF

8.90 Small Cap Value -ETF-IJS7.55 Midcap-Growth-ETF-JKH6.78 Small Cap Growth -ETF--JKK

BONDS- Marginal Efficiency of Investments-Power Coefficient Analysis

Summary- BOND FUND Ratings > Aggegate Bond Index-LAG

Power Rating …… Fund9.44 Dodge and Cox Bond Income_DODIX

9.06 Fidelity New Markets Income-FNMIX

7.36 Category Average(SPDR Barkleys US bond aggregate Index)-LAG

International Funds- MEI - Power Coefficient Analysis

Summary- International FUND RatingsPower Rating >International Index-ACWX

8.25 Artisian Global Opportunities-ARTRX

7.60 Tweedy Browne Global Value-TBGVX6.16 Artisian International-ARTKX

3.82 International Index-ACWX

Proposition 2 Proposition 2 - - Marginal Efficiency of Revenue-(MER) Marginal Efficiency of Revenue-(MER) – – (Con)(Con)ssEE EE Ghant Chart – Proposition-2Ghant Chart – Proposition-2

– The optimum allocation across the total equity preference wasThe optimum allocation across the total equity preference was LC= 40%LC= 40% MC=45%MC=45% SC= 15%SC= 15%

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–Thus: The % equity split for different Equity to fixed Income allocations 70%/30%, 60%/40% and 50%/50% are

1. 70% Equity 30% Fixed Income – The allocation WITHIN the 70% equity=- 40% * 70%= 28%- 45%* 70%= 32%- 15%* 70% = 10% TOTAL = 70%

2. 60% Equity 40% Fixed Income –The allocation WITHIN the 60% equity =-40% * 60%= 24%-45%* 60%= 27%-15%* 60% = 9%

TOTAL = 60%


50% Equity 50% Fixed Income – The allocation WITHIN the 50% equity=50% Equity 50% Fixed Income – The allocation WITHIN the 50% equity=– 40% * 50%= 20%40% * 50%= 20%– 45% * 50%= 23%45% * 50%= 23%– 15% * 50% = 7 %15% * 50% = 7 %

TOTAL = 50%TOTAL = 50%

See Exhibit 9….For the above results summarizedSee Exhibit 9….For the above results summarized The percentages calculated above are summarized in Column 1, 2,3 The percentages calculated above are summarized in Column 1, 2,3 The results yield the Dollars greater than the S&P 500 for each % splitThe results yield the Dollars greater than the S&P 500 for each % split

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Proposition 2 - Marginal Efficiency of Revenue-(MER) – (Con)SEE Ghant Chart – Proposition-2

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Proposition-2: Derive the Optimum % allocation across Styles(LC,MC,SC)-MER

Monte Carlo Simulations

Calculate Asset Allocation of Equities –LC,MC,SC

MER Power Coef per unit of Risk (LC, MC, SC) = (W*X * Y*) Z

W= From the Monte Carlo Simulation for each style. The Probability that particular style(LC,MC,SC) exceeds the S&P 500. x= Mean MEI Power Coefficient for LC, MC, SCY= Dollars > S&P 500- 10 year revenue Growth > S&P 500Z= Standard Deviation – A measure of Risk for Each LC, MC, SC simulation

MER Algorithum

Dodge & Cox LC Income DODGX

Champlain MC ADV CIPMX

Mairs & Power -MSCFX

Fidelity Small Cap Value-FCPVXVanguard Dividend Growth VDGFX

American Century Mid Cap Value-ACMVX

MER Power Coef (LC, MC, SC) = (W*X * Y*) Z

Proposition-2- Optimum % Equity Allocations

Use MER to Calculate % Equities AllocationLarge Cap Mid Cap Small Cap

45%-CIPMX 15%-MSCFX 40%- DODGX

1-What is the Optimum % EQUITY Allocations

Proposition-2: Derive the Optimum % allocation across Styles(LC,MC,SC)-MER

Optimum % EQUITY Allocations

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Proposition 3 Proposition 3 - - Comparative Analysis Comparative Analysis – – See Ghant Chart - Proposition-3 and Exhibit ‘s 10-11-12See Ghant Chart - Proposition-3 and Exhibit ‘s 10-11-12

– From Proposition 1&2 above we now have an optimum portfolio that we can compare and contrast with the baseline portfolio containing the S&P 500 And a Bond Index fund(LAG)

– The following Portfolio ‘s will be analyzed via Monte Carlo simulations to determine investor The following Portfolio ‘s will be analyzed via Monte Carlo simulations to determine investor value/risk vs returnvalue/risk vs return

– 1-Comparatives Economics of Alternative Equity/Debt 1-Comparatives Economics of Alternative Equity/Debt Allocations:Allocations: ToTotal of: % Large Caps + %Midcaps +%Small Caps + %Fixed Income = $1.00tal of: % Large Caps + %Midcaps +%Small Caps + %Fixed Income = $1.00 Total Of S&P 500 baseline =% VFINX(S&P 500 Benchmark) + %LAG(Bond Benchmark)= $1.00Total Of S&P 500 baseline =% VFINX(S&P 500 Benchmark) + %LAG(Bond Benchmark)= $1.00

– 2-70% Equity vs 30% Debt – SEE Ghant Chart & Exhibit-102-70% Equity vs 30% Debt – SEE Ghant Chart & Exhibit-10 Equity AllocationEquity Allocation

– 29% Vanguard Dividend Growth- VDGIF29% Vanguard Dividend Growth- VDGIF– 31% American Century Mid cap Value- ACMVX31% American Century Mid cap Value- ACMVX– 10% Fidelity Small Cap Value- FCPVX10% Fidelity Small Cap Value- FCPVX

Fixed Income(Bond) allocationFixed Income(Bond) allocation– 30% Metropolitan West Total Return- MWTRX30% Metropolitan West Total Return- MWTRX

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Results: There is a 59% probability the 70/30 % diversified Portfolio > the S&P 500 and a 30% > $ per unit of risk.

– 3-60% Equity vs 40% Debt – See Ghant Chart & Exhibit -113-60% Equity vs 40% Debt – See Ghant Chart & Exhibit -11 Equity AllocationEquity Allocation

– 25% Vanguard Dividend Growth- VDGIF25% Vanguard Dividend Growth- VDGIF– 26% American Century Mid cap Value- ACMVX26% American Century Mid cap Value- ACMVX– 9% Fidelity Small Cap Value- FCPVX9% Fidelity Small Cap Value- FCPVX

Fixed Income(Bond) allocationFixed Income(Bond) allocation– 40% Metropolitan West Total Return- MWTRX40% Metropolitan West Total Return- MWTRX

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Abstract: An UpdateAbstract: An UpdateProposition 3 - Comparative Analysis –

(Con)


- 4-50% Equity vs 50% Debt- See Ghant Chart & Exhibit 12 - Equity Allocation

- 21% Vanguard Dividend Growth- VDGIF - 22% American Century Mid cap Value- ACMVX - 7% Fidelity Small Cap Value- FCPVX

- Fixed Income(Bond) allocation50% Metropolitan West Total Return- MWTRX


The ALPHA’s for the recommended portfolio have high The ALPHA’s for the recommended portfolio have high multiples( 2.7 to 7.2) compared to the S&P 500multiples( 2.7 to 7.2) compared to the S&P 500

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45%-CIPMX 15%-MSCFX 40%- DODGX


70/30% - Equity /Bond Allocation Portfolio

70% S&P-VFINX

70/30% Benchmark S&P 500 /LAG Bond Portfolio

30% LAG Bond

Equity Fixed Income Fixed IncomeEquity

The Mean of the 70/30% Optimum Equity Allocation is $5.26 which is 16% greater than the S&P allocated portfolio of $4.55. The probability is 59% that the 70/30% Optimum equity allocation will exceed the S&P 500 mean. Further, the 70/30% allocation yield a 30% better Return per unit of risk than the benchmark S&P 500 portfolio


32% CIPMX

28%- DODGX

10%-MSCFX 30%- DODGX

Proposition-3- Results-Compare Various Portfolio Allocations with an S&P 500 Portfolio

MEI/MER Ghant Chart


GIVEN- Proposition-2- Optimum % Equity Allocations

Alternative Portfolio Allocations Benchmark Portfolio

24%

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Compare the Optimum Portfolio Allocations with an S&P 500 Portfolio

60/40% Bench Mark S&P 500 /LAG Bond


Proposition-3


Proposition-3 Results

MEI/MER Ghant Chart

The Mean of the 60/40% Optimum Equity Allocation is $5.09 which is 6.3% greater than the S&P allocated portfolio of $4.79. The probability is 54% that the 60/40% Optimum equity allocation will exceed the S&P 500 mean. Further, the 60/40% allocation yield a 27% better Return per unit of risk than the benchmark S&P 500 portfolio

27%24% 9% 50% 40% LAG Bond 60% S&P-VFINX



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Compare the Optimum Portfolio Allocations with an S&P 500 Portfolio



Proposition-3


Proposition-3 Results

MEI/MER Ghant Chart

The Mean of the 50/50% Optimum Equity Allocation is $4.88 which is 3.3% greater than the S&P allocated portfolio of $4.72. The probability is 53% that the 70/30% Optimum equity allocation will exceed the S&P 500 mean. Further, the 50/50% allocation yield a 6% better Return per unit of risk than the benchmark S&P 500 portfolio

22%21% 7% 50% 50% LAG Bond 50% S&P-VFINX


50/50% Bench Mark S&P 500 /LAG Bond

Mer update march-2017

Economy & Finance

Transcript of Mer update march-2017