Practical analysis for investment professionals
30 December 2012

Portfolio Management: My Top Picks from 2012

Posted In: Best Of

Portfolio management is a topic that has consistently been one of the most popular according to our member surveys. During 2012, more than 150 blog posts on this topic have been published on the Enterprising Investor. Focusing on posts that relate to the most interesting and important issues in portfolio management, here are my top five picks:

  • Is asset allocation all that matters in the performance of an investment portfolio? “Most investment professionals practicing today have heard the oft-repeated adage about the singular significance asset allocation has on portfolio performance,” according to David Larrabee, CFA, “but it may be a minority that is aware of the empirical history and controversy underlying this topic. Evidence shows that the groundbreaking research on the importance of asset allocation has been poorly understood and widely misquoted.” Larrabee’s article “Setting the Record Straight on Asset Allocation” reviews the research studies conduct over the years and provides an outstanding examination of the subject.
  • The Feuding Tribes of Practitioners (and Theorists) in Investment Management”  provides an overview of how quantitative approaches (which draw heavily on statistics and other branches of mathematics) have evolved alongside but apart from “qualitative” approaches (such as traditional fundamental analysis and the more recently developed behavioral finance), and how tribes have formed around each of these approaches — contending for supremacy and influence.
  • If the global financial crisis has left us with any enduring lessons, it’s that asset return distributions can be significantly skewed and asymmetrical, and that fat tails are the norm rather than the exception. So how can investment practitioners manage this reality? Did asset allocation and portfolio diversification fail? Is modern portfolio theory bruised, broken, misunderstood, and misapplied?
  • Over the last 25 years, there has been one crisis every four years on average. The traditional asset management approach may have worked in the 1990s, during what proved to be an exceptionally long period of stability. But clearly it has not worked in the past 15 years. Against this backdrop of heightened volatility and “fat tail” events, a paradigm shift is taking place in the industry, with the traditional approach in asset allocation and portfolio management giving way to a new approach that holds the promise of working better during periods of instability and crisis, as well as in an environment of low investment returns.
  • Do good investment managers give away great ideas? “Talking the book” is entirely rational according to recent research studies. A study on recommendations posted to the Value Investment Club found that stock picks on the site delivered average estimated annualized alpha of between 6% and 24%, depending on the methodology applied and the time period studied.

For more news and trends, visit the Portfolio Management Community of Practice.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Samuel Lum, CFA

Samuel Lum, CFA, is director of Private Wealth and Capital Markets at CFA Institute. He focuses on wealth management and capital markets, mainly in an Asia- Pacific context. Lum's current research and development interests include investment policy, asset allocation, exchange-traded funds and products, indexing methodologies, family office and governance issues, alternative assets, and risk management. He has more than 20 years of professional experience in the investment industry, encompassing investment portfolio management at Hutchison Whampoa, a global conglomerate based in Hong Kong; wealth management in the trust division of the TD Bank Financial Group, covering the Asian markets; investment portfolio management, fund and treasury management, corporate finance, and capital markets research at the treasury division of the Ontario Hydro Corporation; and securities brokerage in an online financial services joint venture of subsidiaries of Credit Suisse and Hutchison Whampoa. Lum holds the CAIA, FRM, and TEP professional designations. He also holds an MBA degree. Topical Expertise: Portfolio Management · Private Wealth Management

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