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Back to basics

Hmmm – Frontier Capital Management? I thought to myself as I perused the agenda for the optional yet impressively well-attended seminars on the first morning of the 2009 IFP annual conference and exhibition. I do not believe I am familiar with their work and find myself wondering why I have not come across them before at the many and varied adviser events I have attended in recent years.

Ah, that’ll be why, then, I thought to myself as Michael Azlen, Frontier’s founder and CEO, outlined the first of the company’s “four pillars of investing”. “Traditional and alternative asset classes will generate a return above inflation in the medium to long term,” he asserted, before adding that this can be achieved without the services of an active fund manager.

Resisting the urge to walk out in protest at such heresy, I listened on and rediscovered a number of things I had forgotten about investment.
The last presentation where I was reminded how asset allocation is far and away the most significant portfolio driver – you know, the Brinson, Hood, Beebower stat that it accounts for 91.5 per cent of performance – was way back around the dawn of time. Very possibly even 2007. But here we were again with Azlen saying: “Once you complete your asset allocation, you are done.”

No doubt everybody stopped talking about asset allocation because it really did not matter too much where you were invested in 2008 – pretty much everything went south. Even so, I am not sure that counts as an argument against. After all, an equally weighted portfolio of, say, global equities, global bonds, property and commodities would have made for a messy year but not nearly as messy as if the portfolio had merely been equities, property or commodities.

For its part, Frontier looks to, and I quote, “target high risk-adjusted returns by diversification across eight traditional and alternative asset classes accessed by low-cost active indexing strategies”. Those asset classes are global equities, global bonds, emerging equities, emerging bonds, real estate, commodities, hedge funds and managed futures.

Since 1991, says Frontier, all bar global bonds and hedge funds have enjoyed at least one calendar year as the best-performing asset while only hedge funds have never finished a year as the worst-performing asset class. So, yes, market timing would be great – if only we were psychic. Indeed, Azlen was happy to wheel out some numbers on market timers who try their hand without that vital knack.

Thus one study of market strategists going back to 1929 found that the consensus was wrong a mere three-quarters of the time while another study of 237 market-timing newsletters found no advisers to be consistently correct. Credit where it’s due, however, the one area of consistency was that the worst advisers were wrong very often.

The state of play is summed up neatly by Jack Bogle, the founder of Vanguard. “I don’t know anyone who has been successful at market timing,” he once said, “and I don’t know anyone who knows anyone who has been successful.”

It seems I have run out of space in which to go into Azlen’s thoughts on modern portfolio theory and the efficient frontier or even his company’s own interesting work – having accepted there is no way of knowing future returns but one can certainly target a particular level of risk – on analysing the asset alloc-ation strategies of the big US endowments such as Harvard and Yale. Another time, maybe.

Azlen summed up one part of his talk, saying markets, courtesy of the risk premium, create wealth, bad behaviour destroys wealth, inflation erodes wealth and fees and costs erode wealth – and it is probably no major surp-rise to find a champion of active indexing strategies highlighting the issue of fees and costs or indeed, well, championing active index strategies.

Regular visitors to this space will be aware of this column’s stance on the active v passive debate – clue – there is no debate, both have a part to play – but I have a different point to make today. Just because 2008 was a nightmare year for active and passive investors alike, that is no reason to bin one of the founding principles of portfolio construction.

Julian Marr is editorial director of


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