Camarda’s original asset allocation process was called ISIS™, for Integrated Strategic Investment System™, which we developed almost 20 ago. We successfully had it trademarked with the U.S. Patent Office in 2004, and it was named a “Top Innovation” by the Florida Times Union at the time. It has been refined and redefined over the years, with the last major redesign about four years ago.
After what we think has been a long and good service, ISIS™ is about to go down.
For one thing, it is clearly time for a name change. While we had it first (if you forget the ancient goddess of the same name or the Bob Dylan song), we have no wish to be even remotely associated with the abomination which goes by the same acronym. Secondly, we think it is time for a brand new system. While I have invested my own family’s money in ISIS™ since the 1990s, and have been generally pleased with the performance, we have come to believe the investment landscape has changed so much that a new system instead of a major overhaul is required. Such a change has been a near-monthly topic of your Portfolio Board’s sessions for nearly two years, but we wanted to avoid a knee-jerk decision and possibly avoid missing a big bounce. I also wanted to finish my PhD courses before making major changes to be sure to be able to apply all aspects of my new knowledge to improve the service we provide to our clients in this changing, dangerous world.
It is worth noting that much of the investment advisory world still rests on the same academic foundation on which ISIS™ was built, including such theories as rational expectations, the efficient market hypotheses, Modern Portfolio Theory, and other mid-20th century economics. They even taut claims like “building on decades of Nobel Prize-winning research. We aim to achieve the best investor returns possible,” as we once did (Betterment). The only problem, as I have come to learn in my PhD studies, is that these theories have been widely refuted in recent years by many renowned economists, like Robert Shiller. They have also been belied by world events, like the blow up of Long-Term Capital Management (overseen by two “old school” Nobel Prize winners), the mortgage/real estate bubble leading the Great Crash of 2008, and so on. This is one of the nice things about being a practicing academic; keeping abreast of new and even cutting edge research instead of relying on outdated marketing dogma, which most of the advisory industry seems to do. Much of academia (including me, dragged kicking and screaming from years and years of past learning) has come to believe what should have been obvious in the ivory towers: people are not bloodless computers with unlimited information who unfailingly get investments’ prices exactly right. Instead, they frequently make poor, uninformed, irrational decisions, and stock markets swing way too high, and way too low, creating chaos, heartbreak—and opportunity. There is lot of boneheaded, Neanderthal thinking that drives the markets. A newer (2002) Noble Prize than for Modern Portfolio Theory (the “modern” dates from the 1950s . . . and the prize from 1990, by the way) in economics—won by a psychologist, of all things—has laid the foundation for behavioral finance (BH), which many smart people believe provides a much better explanation of investing than is followed (at least for now) by most of the industry. Uber-successful investors like George Soros have used BH methods for decades, but most of the world still has not caught up. One reason is that the “old school” methodology seemed to work reasonably well in the past, and, in fact, gave our ISIS™ a very long run of which we are quite proud. But the world constantly changes, and the 2008 meltdown may have revealed the success of traditional asset allocation—still the go-to method for most advisory firms—to be more lucky coincidence than reliable outcome. On top of this, the integration of world economies, coupled with the speed and richness of communications and information access, has truly changed the investment world in fundamental ways. It was not so long ago that you could not even find a quote for Chinese stocks. Now, Beijing sneezes, and all of New York gets the Asian flu.
So be it.
It is time to move on. To replace ISIS™, I—with the help of Jonathan Camarda and Dr. Thanh Bui of your Portfolio Management Board—have been developing what I call AIMS™, for Allocated Investment Management System™, for the past six months. While asset allocation—diversifying investments over different types, like foreign vs. U.S. stocks, and using funds instead of individual stocks to spread risk over many companies – remains a valuable style, AIMS™ is designed to be much more selective in picking promising asset classes than mainstream, traditional asset allocation like the old ISIS™ and the new Betterment, Wealthfront, and most other index-based advisory programs. When we first built ISIS™, we felt it was very cutting edge—produced long-term results we remain very proud of—and was even named a “Top Innovation” by the press. We believe AIMS™ will be every bit as innovative in harnessing investment opportunity in the new, changed world that lies ahead. One major difference is that AIMS™ will rely on a host of proprietary factors intended to pick just the five to seven asset classes we expect to outperform over the mid-term investment horizon. We will consider global and regional macroeconomics, our currency and interest rate forecasts, deep technical (“momentum”) and fundamental (“deep value”) factors, index exposure (recent research I’ve found indicates groups of stocks in indexes tend to be overpriced relative to similar ones not in indexes, which I ascribe to the massive, blind buying pressure—supply and demand forces—coming from the huge increase in popularity of index strategies), and more. AIMS™ will also be free to invest in fund types besides active mutual funds and traditional ETFs, including the newer active ETFs as they develop and gain merit, and, for the first time, closed end funds (CEFs). CEFs are like ETFs except there is a fixed number of sharers—if you want one, you need to buy it from another investor instead of having a new one printed for you, as for open-ended structures like mutual funds and ETFs. This makes CEFs subject to supply and demand forces in pricing, which means you can often buy them for less than the underlying value (< net asset value or NAV). To oversimplify, if a CEF owns nothing but one share of XYZ stock that trades on the exchange for $100, the CEF’s NAV is $100, but it may trade for as little as $85 or less. This adds another layer of significant profit opportunity to AIMS™. AIMS™ will also have enhanced systems for tax reduction harvesting, and client—and model—level rebalancing.
That’s probably more technical detail than you want, so I will stop. Clearly, we are very excited for you about the new AIMS™ rollout, and we think you will be too. We hope you will be amazed and delighted! Stay tuned for more updates as we gear up to implement!