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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
Vanguard Equity Income=VFINX
Small Cap 1-Maiirs & Power MSCFX2- Small Cap Bend-ETF-IJR
10.169.74
Vanguard Equity Income=VFINX
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%
Abstract: An UpdateAbstract: An Update
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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Abstract: An UpdateAbstract: An Update
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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Abstract: An UpdateAbstract: An Update
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)
Results: There is a 54% probability the 60/40 % diversified Portfolio > the S&P 500 and a 27% > $ per unit of risk.
- 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
Results: There is a 53% probability the 50/50 % diversified Portfolio > the S&P 500 and a 6% > $ per unit of risk.
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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Abstract: An UpdateAbstract: An Update
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45%-CIPMX 15%-MSCFX 40%- DODGX
Monte Carlo Simulations
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
Monte Carlo Simulations
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
Monte Carlo Simulations
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
Equity Fixed Income Fixed IncomeEquity
Proposition-3
Monte Carlo Simulations
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
Monte Carlo Simulations
60/40% - Equity /Bond Allocation Portfolio
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Compare the Optimum Portfolio Allocations with an S&P 500 Portfolio
50/50% - Equity /Bond Allocation Portfolio
Equity Fixed Income Fixed IncomeEquity
Proposition-3
Monte Carlo Simulations
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
Monte Carlo Simulations
50/50% Bench Mark S&P 500 /LAG Bond