As senior financial advisor at Anchor Capital Management Group, Inc., in Irvine, California, Leon James applies the quantitative analysis and strategic asset allocation used with his institutional clients to individuals who are retiring.
Institutional clients typically allocate among money managers to diversify risk and returns. So James thought it was wise to use this strategy for his private clients, and started doing so in April. Anchor Capital developed the allocation among money managers concept for retirees, using four proprietary portfolios for asset allocation. Retirees, or those on their way to retirement, can spread their assets between two or more of these portfolios. Each portfolio is designed to make money in a different environment so having a mix of assets among them will keep retirees’ principal and assets growing and hedged against losses in different market environments, according to James. Anchor has been using this approach with institutions for a couple of years.
“The more aggressive portfolio uses only two of those strategies. When one trading model may not do well in bear markets, another may perform best in bear or sideways markets,” James, 56, says. The allocations are “synergistic.”
The four portfolios include a mean reversion sector rotation, which is a strategy of not holding securities for a long period to exploit high fluctuations in the market. This approach can prove highly profitable, but the risk factor is very high. “Most retirees can’t handle that [market] ride,” James says. The strategy “works best in a bull or a flat market and may have an 18% to 19% drawdown but when you pair strategies together, you can reduce to 3% to 4% drawdown.” Anchor Capital looks for sectors that have fallen off of their mean but have a tendency to revert back. “Once it reverts, we get out,” he says. The second strategy is long-short fixed income, which is used for hedging and works in a subprime market for bonds or a bear or sideways market. The third strategy is long-short equity index trading, which is most effective in strong bull or bear markets; and, finally, statistical arbitrage between securities, which is effective in flat markets or if there is a slight movement in the market. It is based on statistical methods using historical relationships between the securities–not the market’s overall trend, but past performance and how the securities relate to each other, James explains.
A Technique That Pays Off