ReSolve Asset Management Proposes Strategy to Challenge Warren Buffett’s Favorite Index Over Next 10 Years

ReSolve combines global risk parity with long-short factor investing to maximize returns without relying on expensive stocks and bonds.

Press Release updated: Nov 1, 2017 00:12 EDT

In 2008, Warren Buffett proposed a public bet that actively managed investment products, plagued by high fees, would not be up to the task of beating a passive investment in the Vanguard S&P 500 ETF over the subsequent decade. Ted Seides from Protégé Partners took the other side of the bet with a portfolio of funds-of-hedge-funds. As the bet expires in two months, it’s all but certain that Buffett will collect on his wager.

As the horizon for the current 10-year bet draws to a close, many investors are wondering, “How should I position my portfolio for the coming decade?”

According to ReSolve Asset Management’s President Michael Philbrick, “Investors are looking down the barrel of one of most challenging investment environments we’ve seen over the past century. Traditional portfolios stuffed with North American stocks and bonds are priced to deliver between 0% and 2% after inflation over the next decade or more. Investors need real options that can produce the returns they need without relying on domestic stocks and bonds for the heavy lifting.”

Investors are looking down the barrel of one of most challenging investment environments we’ve seen over the past century.

Michael Philbrick, President, ReSolve Asset Management

ReSolve defines risk as the probability that clients won’t achieve their financial objectives. Their investment framework for the next decade is based on global risk parity and academic factor strategies, which may offer a greater likelihood of producing the returns investors need, with less risk than they would be taking with a concentrated investment in the S&P 500 index.

Global Risk Parity

The cornerstone of ReSolve’s solution is global diversification. While North American stocks and developed market bonds are expensive, other pockets of world markets offer compelling value. International stocks and emerging market bonds and currencies imply relatively high future returns, but these obscure assets are often eschewed by private investors.

“Global risk parity strategies provide access to all the world’s major growth engines,” emphasizes Rodrigo Gordillo, Managing Partner. “They also contain assets that are designed to produce explosive growth during periods that are hostile to stocks and bonds. The challenge is how to integrate assets with such diverse personalities so that they can all shine at the appropriate time.” For more information about risk parity, visit RiskParity.ca.

The concept of diversification extends to other sources of return that behave differently than the major asset classes themselves. These strategies take advantage of the fact that many investors make persistent errors that other investors can capitalize on.

“It is well-documented that investors in most countries around the world have a strong preference to own the stock and debt of their own domestic companies. This home bias is one of the strongest and most pervasive effects in markets,” stresses Adam Butler, ReSolve’s Chief Investment Officer.

“In addition, many investors express a preference for investments in their own domestic market; for ‘lottery ticket’-type investments, and; for investments that are popular or appear to have a good story. Investors also take comfort in holding portfolios that are consistent with their peer group because the pain of underperforming their friends is much more intense than the joy of outperforming them.”

Butler draws heavily on the academic literature, which documents how these and other investor errors manifest in very large economic effects in every corner of markets. These effects are called “factors” by academics, while practitioners refer to them as “style premia”. “Most investment capital is still guided by humans, and humans can be counted on to consistently behave in certain ways.”

ReSolve’s proposed solution includes allocations to the most academically validated style premia. These include the popular value factor, along with more obscure but equally powerful strategies like momentum, low-volatility, carry, and trend. Pure factor strategies are created by taking both long and short positions in global stocks, bonds, and index securities. As a result, they do not rely on persistent upward motion in these securities to generate returns.

Global Diversified Premia Strategy

ReSolve has named their most optimal strategy for the next decade the “Global Diversified Premia Strategy”. Their comprehensive report details historical performance and risk measures for the constituents of each sleeve of the proposed strategy, along with forecasts and implications.

Mike Philbrick sums up the report, “At ReSolve we believe risk is the probability that an investor will not meet their financial objectives. In this context, and given current historically rich developed-market stock and bond valuations, we think traditional portfolios are extremely risky. We believe our proposed Global Diversified Premia framework based on risk parity and factors is well-positioned to deliver considerably better outcomes than traditional portfolios over the next 10-20 years, with less risk.”

Download the full report here.

About ReSolve Asset Management:
ReSolve Asset Management designs and executes systematic quantitative asset allocation strategies offered through mutual funds, Exchange Traded Funds, and funds for Qualified Eligible Investors in the United States, Canada, and internationally. U.S. investors can also invest directly through the ReSolve Online Advisor. To learn more about ReSolve’s Adaptive Asset Allocation, Risk Parity, and Evolution strategies visit investresolve.com. For information about ReSolve’s research methods, visit InvestReSolve.com/blog.

Contact:
Ani Yildirim
Director, Marketing and Communications
[email protected]
(1) 647 2531135

Source: ReSolve Asset Management

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About the Author: Carrie Brunner

Carrie Brunner grew up in a small town in northern New Brunswick. She studied chemistry in college, graduated, and married her husband one month later. They were then blessed with two baby boys within the first four years of marriage. Having babies gave their family a desire to return to the old paths – to nourish their family with traditional, homegrown foods; rid their home of toxic chemicals and petroleum products; and give their boys a chance to know a simple, sustainable way of life. They are currently building a homestead from scratch on two little acres in central Texas. There’s a lot to be done to become somewhat self-sufficient, but they are debt-free and get to spend their days living this simple, good life together with their five young children. Carrie writes mostly on provincial stories.
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