Dissection of an Investment Presentation (Part 5)
Posted by Mark on June 19, 2018 at 06:50 | Last modified: January 2, 2018 11:53The next slide continues with the process of portfolio selection.
Starting with a parent index such as the Russell 1000 or Russell 3000:
> PMC uses a proprietary methodology to rank the…
Companies often describe their methods as proprietary. I view “proprietary” as a fancy word that gives the adviser authorization to conceal details. Whether this is acceptable is a topic for later discussion.
> constituents according to momentum and value, well-known
> factors grounded financial [sic] economic theory.
As discussed in Part 1, “well-known,” “grounded,” and “economic theory” are meaningless terms without supporting evidence and/or further explanation.
> Constituents are reweighted according to the factors,
How is this done?
> resulting in the Envestnet Factor-Enhanced Index.
Note the professionally-sounding, marketable product name.
> PMC’s Quantitative Research Group (QRG) and…
“Quantitative Research Group” sounds very official in addition to getting its own abbreviation. I discussed “quantitative” in Part 1. My guideline is to only assign abbreviations when I am going to be using them later.* I see no other references to QRG in this presentation, which makes me think sales and marketing as it seems sophisticated, meaningful, and compelling.
“Research” is misleading because neither supporting evidence nor methodological description is given. In scientific research, investigators provide sufficient details to enable replication by others. Study replication with similar results can represent strong validation.
“Group” enhances credibility because people working together imply better accuracy.
> experienced portfolio managers review the portfolio…
Degree of skill (not discussed) at managing portfolios is more important than experience (not quantified) in doing so.
> to ensure target factor exposures, tracking error
> allowances, and liquidity constraints are satisfied.
What is the target number? How much tracking error is allowed? What are the liquidity constraints? If they don’t provide enough detail to replicate the study then they can claim anything. Realizing this diminishes their credibility.
> The resulting Factor-Enhanced Portfolio model
> is a concentrated portfolio of 75+ positions providing
> exposures to desired factor exposures [sic?].
The performance graphs discussed here were not for the Factor-Enhanced Portfolio. Those graphs were for momentum and value factors and indexes, which themselves are nebulous terms. In truth, they have described an elaborate-sounding investing strategy without providing any concrete [validated performance] reason to invest.
Other questions about the portfolio also come to mind. How often is it rebalanced? Is this the same as “reweighting?” What is the turnover? These are examples of meaningful [performance-related] information that has been overlooked.
The next slide discusses tracking error:
“Tracking error is higher when the strategy outperforms and is very low when the strategy performs in-line with the parent index,” the presentation claims.
I fail to see any pertinence to potential investors, which suggests its inclusion is probably for the purposes of sales and marketing. If I thought this to be important then I would ask how the numbers were calculated. Past performance is also no guarantee of future results and as retrospective analysis that may be curve-fit, tracking error may be meaningless anyway.
The portion reviewed today is heavy on sales and marketing techniques while being light in terms of relevant information.
* Apparently the Chicago Manual of Style advises against abbreviations unless used at least five times in a
manuscript (my posts rarely exceed 500 words, which make for some very short manuscripts).