Replicas Small Cap Portfolio Notes

Our small cap portfolio recently rebalanced.  Key portfolio changes include:

Wisdomtree Investments Inc,  (WETF), operates as an exchange-traded fund (ETF) sponsor and asset manager.  It creates and offers ETFs in equities, currency, fixed income, and alternative asset classes.  The company also licenses its indexes to third parties for proprietary products.  The company was founded in 1985 and headquartered in NYC.

Asbury Automotive Group Inc., (ABG),  operates as an automotive retailer in the United States.  It offers new and used vehicles, vehicle maintenance, replacement parts, collision repair, and financing and insurance services.  The company was founded in 1995 and is based in Duluth Georgia.  






The portfolio’s cash weighting is at 19.48%.

If you are interested in reviewing our security and sector weightings and interested in purchasing this portfolio, please feel free to view our proprietary Replica on the Motif-Dealer platform by clicking here.


This is not your fathers' algebra!

We have discussed portfolio replication or cloning in past blog posts.

We’ve covered the definition, the uses, the benefits, and detailed a case study complete with the study’s favorable findings for using the replication tool as a solution to your client’s investment needs.

We mentioned that portfolio replication is based upon the same technologies used to clone DNA. Makes sense. Right?

Perhaps a bit of an introduction to the technology would be helpful, but no one wants to get lost in the weeds. Fair enough.

As you might expect, the replication process is grounded in math. ( I can hear the collective groans, but stay with me.) Granted the math is complex and a bit complicated at times, but together we can decode it a bit for the purposes of this blog.

We base the technology on predictive analytics. Predictive analytics includes statistical techniques, modeling, data mining, game theory, and optimization theory to take historical facts and make predictions regarding future events.

Complex algorithmic equations seek to identify time series observations.

In our case, those time series observations would be daily closing prices on a registered mutual fund. Once these observations are identified, the algorithms then begin to look for patterns in those closing prices. The technology actually “teaches” itself to identify, study, and draw conclusions regarding these pricing patterns.

The next step is to rake what it’s learned, and actually predict future pricing movements based upon what the technology has learned.

Remember the phrase, “History has a way of repeating itself?” The technology understands that concept.

The best part of the whole process is that the technology actually measures its predictive effectiveness, and corrects itself to make future predictions more accurate.

It’s a concept commonly referred to as Machine Based Learning. Not a bad AutoCorrect function!

It all goes into making the replication process more accurate as time elapses.

A mathematical process that continually corrects its errors, who wouldn’t have wanted that while taking a high school algebra test?

For more information about Replicas, click here.

To see one in action, click here!

Our Large Cap Replica Portfolio Re-balanced

Our large cap replica portfolio recently rebalanced.  Key changes to the portfolio included:

Goldman Sachs Group, Inc.,  (GS.PA)  operates a global investment banking , securities, and investment management company.   The company operates through four operating divisions: Investment Banking, Institutional Client Services, Investing and Lending, and Investment Management.  Goldman Sachs was founded in 1869 and is headquartered in New York City.

eBAY Inc.,  (eBAY) is a technology company that enables commerce any payments on behalf of various types of users  eBAY operates in three segments:  Marketplaces, Payments, and Enterprise.  eBAY was founded in 1995 and is headquartered in San Jose, CA.

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The portfolio’s cash weighting has remained relatively constant at just above 7%.

If you are interested in reviewing our security and sector weightings, please feel free to view our proprietary Replica portfolios by clicking here.

Game On!

Game Time!

It’s time to get those X’s and O’s organized into a strategic plan. 

We all want to invest the same way the “Pros” do on Wall Street.  Whether an investor client has $5000 or $500 million to invest, they all want the same thing; maximum return with an appropriate amount of risk associated with the expected return.

It’s easy to articulate, but not quite as easy to execute. 

We have to keep score, so a comparative custom index of some sort will be our hurdle. 

Unfortunately, that hurdle is difficult to clear on a consistent basis.  Management fees, fund expenses, and transaction costs, team up to keep us from “leaping” high enough to clear the bar.  However, with the right “equipment” we can greatly reduce those fee and expense “weights” and significantly increase our probability of beating the comparative index.

Diversification is the basic tenant that all institutional pros use as their investment foundation.  Market capitalization and investment style are the most common building blocks of diversification. 

We will “construct” a sample portfolio of top funds as our custom index benchmark, and compare that index performance to that of a “replicated” version of that index.  (For illustration purposes, we will only use large cap funds for the time being).

However, once we have an “official’s time out” to review, we find a few problems. 

Most of these funds carry an expense ratio of .80% on the low end to 1.20% on the high end, making it a problem to clear our index hurdle.  Even if the expenses don’t slow us down, the minimum investment on some of these funds are in the $5 million to $10 million range.  Throw in transaction expenses and we’re just adding insult to injury.

As investors we want access to this custom portfolio, but we don’t want the high fees and costs associated with it, not to mention the minimum asset levels. 

We need a “franchise” player to make this work.  His name is Portfolio Replication, and he brings an impressive game.

Let’s look at the results of a recent historical study showing the effects of Portfolio Replication on our custom fund index that we constructed using highly rated Large Cap Growth and Large Cap Value Funds.  We will assume an even weighting among the funds for diversification. 

The study period:  12/1/2009 – 11/30/2014  (5 Years)


Our custom fund index is a tremendous collection of large cap funds.  Unfortunately, the minimum asset level required to buy that list of funds is out of reach for most investors.   

Portfolio Replication, with a higher annualized returns AND lower risk levels wins the game.  And with a very strong Alpha generation statistic, Portfolio Replication earns the MVP.   Now investors of all sizes can own a championship team (portfolio) featuring an MVP play maker.

Game ON!

To learn more about our funds, click here

To buy one now in the USA, click here



































I don't care how the bus works...just make sure it runs on time!

We’ve talked about the concept of portfolio replication, and the many benefits and uses that it represents. But you may be asking:

"How does it work?"

 Most replication processes are based on linear regression.

Regression analysis is a process that measures the relationship between a dependent variable and one or more independent variables. It statistically estimates observed relationships among a group of variables. Without getting lost in the weeds, regression is usually better at explaining the past than forecasting the future. Its limited ability to “see into the future” explains why replication is not a common investment process, and not more widely used. When the number of factors (securities) surpasses 8 to 10 holdings, the degradation in performance rapidly increases. You’re left with a less than optimal portfolio with a daily tracking error so high, that it doesn’t make sense.

New quantitative statistical methods allow the portfolio manager to dynamically create and implement a tradable portfolio with a practically unlimited number of factors.

New methods, allow the manager to view replication as an optimization problem, and to optimize the quality of the “fit” of new securities to make the replication work properly. Known as “Advanced Dynamic Modeling”, this process maximizes the potential for better portfolio calibration using publically available data. While publically available fund holding data is at times sparse, Advanced Dynamic Modeling has the ability make the most of that data. In contrast, linear regression would require much more data to maintain stability of portfolio regression.

 So what?

Is the bus running on time? The answer is yes.

With a simple list of portfolio holdings and their respective weightings, Advanced Dynamic Modeling allows the portfolio manager to accurately measure the portfolio’s ACTUAL RETURN versus its EXPECTED RETURN. In addition, the forward looking optimization process can identify changes in holdings since the last public reporting, and offer optimal combinations of new replacement securities for a future period of time. And in real time it gives the portfolio manager quantitative feedback as to the predictive quality and value added.

Get ready.  The Bus is arriving, and the ride is going to be a good one.

Click here to join us.

You can have your cake and eat it too!

Our friends over at NerdWallet published an article a couple of years ago regarding a ten year study of active mutual fund managers and their ability to outperform the index. 

“Study: Only 24% of Active Mutual Fund Managers Outperform the Market Index”, March 27, 2013, By Maxime Rieman.

The study’s findings concluded that only 1 in 4 active managers beat the market for the ten year period. 

“Active managers beat the market by an average of 0.12% before fees, but charge more than the value they create.” 
“Index funds outperform the market on average by 0.80% annually, but active managers have lower risk.”

The study essentially concluded that passive indexing outperforms active managers when taking fees into account. That’s not new, but it continues to confirm what we as investment professionals have known. What was interesting is that the study concluded that risk adjusted returns after fees, were almost identical, meaning that active managers are returning a better return when risk is factored into the equation. You may recall that last week we explored risk exposures imbedded in unmanaged index funds and the perils associated with ignoring those risk exposures.

So if we could come up with an investment solution that combines the risk management of an active asset manager, AND the fee structure of a passive index fund, we would REALLY have something. The result would be consistent, positive, alpha generating investment performance in excess of fees, and an actively managed risk process assuring us that risk exposures would be minimized.  

If you were looking for a working definition of Portfolio Replication, we now have it.  Active management, proactive risk management, and passive pricing…IT’S HERE.

See your mother was not entirely right; you can have your cake and eat it too!!

To learn more, just click here.

Our Large Cap Replica Rebalanced!

Our large cap Replica re-balanced this weekend.  The key change?  100% of JP Morgan dropped off our portfolio security list.  Our systems have indicated that the top large cap managers in the USA eliminated this security from their holdings list this week.

This subsequently pared back our exposure to financial services.

Our largest holdings remain Google, Microsoft, and Visa.

If you are interested in reviewing our security and sector weightings, please feel free to view our proprietary Replica on the Motif Broker-Dealer platform by clicking the box below.


And The Arbs Have It!

Last week we talked about the three A’s of investing: Asset allocationAlpha Generation, and Fee Arbitrage.  

Definitely the most effective of these “A’s” is Fee Arbitrage. If you can buy a new Cadillac for the price of a Chevy Lumina you would take that deal. In the investment world, if you were offered a Morningstar Five Star Fund for a fraction of the price, it’s a no brainer.

The dirty little secret in the mutual fund industry is that many funds are “Closet Indexers”.

Closet indexing is a term that is applied to funds closely mimicking their correlated index, but charging fees for active management. A good rule of thumb is to look at a fund’s five year R Squared Number. R Squared measures the correlation of a fund’s performance to the index. The higher the R Squared number, the higher the correlation. The fund’s performance is largely explained by the movement in the market. If the five year correlation average is in the high 90’s, chances are you’ve found a Closet Index Fund.

With closet indexers charging active fees, it becomes very difficult to outperform the market. 

According to the Investment Company Institute’s 2015 Mutual fund Fact Book, mutual fund assets have risen 36 percent to $2.2 Trillion for the period 2009 to 2015. While a 36 percent rise in assets is commendable, fees, which should fall, only fell 12% during the period. No one is doing us any favors.   When you factor in greater use of institutional and retirement class shares, fees to individual investors haven’t fallen.

Investors continue to pay active fees with expense ratios in 2014 averaging approximately 83 Basis Points, and that includes those institutional and retirement share classes which are generally unavailable to individual investors. It’s difficult if not impossible to outperform the market while “Closet Indexing” and paying full freight for the privilege.

Now back to the “showroom” where those shiny new Cadillacs are on display. Portfolio Replication becomes the” vehicle” of choice. Active Management at Index pricing. Not a bad deal. Time to trade cars!

For more information about our suite of Replicas, please click here.

The Three A's of Successful Investing

Numerous industry studies throughout the years have concluded that long term investment performance can largely be explained by “Asset Allocation.” Knowing a client’s situation, objectives, and time horizon, is the foundation of the Advisor’s relationship with that investor client.

But what makes asset allocation work? How can you keep your client committed to that asset allocation “roadmap”? The answer to those questions brings us to our second “A” word, “Alpha.” Alpha, simply defined, is the excess return that measures a manager’s ability to outperform the market. A manager producing positive Alpha is also producing a positive experience for your client. A positive client experience is every advisor’s goal. A happy client is a lifelong client.

Stock selection, sector weighting and rotation, style weighting and rotation, market timing, and risk management are all techniques managers can employ to produce positive Alpha. In a world without fees, positive Alpha generation is relatively easy for a manager to attain. Unfortunately, that world does not exist.

Back here on earth, we can now introduce the concept of portfolio replication. By replicating or cloning all of the positive alpha generating aspects that superior managers produce and combining those characteristics with significantly reduced fees, we can amplify alpha generation with, wait for it...” Fee Arbitrage.” The last “A” word Arbitrage”, is the sweetest of the three.    

When offered the opportunity to take advantage of pricing differences and access additional profit with little or no additional risk, what client would say no?

Portfolio replication is the catalyst behind that pricing opportunity. Advisors employing replication will receive “A’s” for their efforts.  Join us now as we get ready to revolutionize industry!

For more information, click here.

Coming to an Investment Platform Near You!

Ask any financial advisor to list the challenges he or she faces, you can be assured that fee and revenue compression will be at or near the top of that list. 

The downward pressure on advisors and the fees that they charge for their services has been present for years and shows no signs of subsiding in the future.  Demand for cheaper share classes, cheaper financial advice, availability of investment information via the internet, and the growing fascination with machine leaning robo-advisors, are creating a downdraft on fees that advisors charge.

There are three basic components to delivering an “investment to a client”.  One, the investment management component, generally accounts for forty to fifty percent of the total fees charges.  Two, the investment infrastructure, (accounting, custody, legal, etc.) generally accounts for ten to twenty percent of that cost, and three, the delivery of that investment along with the accompanying advice accounts for roughly forty percent. 

Of those three components, the least scalable is the delivery and advice function.  As a consultant, you know that there are only so many hours in a day, and you have to make them count.

We know that downward fee pressure is not going away, so how do we solve the problem?  Enter the concept of Portfolio Cloning or replication.  Imagine, creating a “Custom index” consisting of nothing but Morning Star Five Star rated funds, at virtually no cost.  You have now provided an allocation meeting your client’s objectives at a significantly reduced investment cost, and simultaneously relieving the pressure on the least leveraged component of the fee equation: your advisor fees. 

Portfolio Cloning (or replication) is coming to a platform near you, and it’s just what the Doctor ordered for your investment clients, and your investment practice.

For more information, click here!

What is portfolio replication?

Capturing true portfolio returns

While the concept of Portfolio replication has been around for some time, it has been shrouded and cloaked in mystery.  Terminology like algorithm, static and dynamic replication, stochastic modeling, linear regression, and tracking error cause most eyes to glaze.
The Farlex Financial Dictionary defines and demystifies the definition of Portfolio Replication.  “A portfolio that attempts to match, as closely as possible, some benchmark or index.”  By using this simple but elegant definition, we can now see how the S & P 500 is a “portfolio” that attempts to match a certain “benchmark”.  (The United States Stock Market).   The concept need not be any more complicated. 
And while the S & P index was introduced in 1923, (the index in its current form was introduced in 1957), modern computing and technology has given us the ability to replicate or “clone” virtually any mutual fund offering.  Closely cloning alpha and beta characteristics, while maintaining a low tracking error, has allowed investment professionals to reduce investment costs and expand the concept of “Solutions Based Investment Consulting”.
Armed with Portfolio Replication, consultants can now offer low cost alternatives to popular mutual fund offerings with more transparency and better risk control.  Custom Indices of mutual funds can be constructed at much lower costs and open the possibility of utilizing additional yield, growth, and risk features.  In addition to the simple “fee arbitrage” benefit, portfolio replication can also be used to solve more complex problems including, SRI/ESG needs, asset based revenue hedging, Variable Annuity basis risk hedging, and investment platform risk exposure hedging.
Get to know the concept of Portfolio Replication.  It’s coming, and it’s going to be here for some time to come.