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August 01, 2009 at 04:00 AM
Recent proclamations in this column and venturepopulist.com blog posts that “MPT failed” in the crisis of 2008 have elicited a distinctively binary response from wealth managers and investment advisors. I have received commendatory and castigating e-mails and comment board posts that prove it.
While many investment advisors responded enthusiastically (having taken note of the impact and frequency that five market meltdowns in the past 22 years has had on their portfolios), a seemingly larger pool of advisors cling desperately to their discredited diversification dogmas and polished pie charts in the hope that investors may have not noticed the failure of their advisors’ mantras and models.
A July 10 front page Wall Street Journal article (“Failure of Fail-Safe Strategy Sends Investors Scrambling”) citing examples of other prominent institutions that likewise believe that prevailing “asset-allocation strategies are fundamentally flawed” has brought this debate to even a larger audience.
Last month in this column and a subsequent Investment Advisor Webinar, I introduced Hybrid Portfolio Theory (HPT) as an alternative to Modern Portfolio Theory (see Events page at InvestmentAdvisor.com to view the archived presentation). HPT comprises two distinct (hybrid) sub-portfolios; the larger (say, 75%) with the primary objectives of insuring safety of principal, liquidity, and income by way of allocations to money markets, CDs, amd municipal and government bonds, while the smaller (25%) portfolio is opportunistically allocated to make investments that have a positive asymmetric outcome (PAO) profile.
What’s a PAO?
PAO opportunities are those characterized by positively-skewed risk/reward ratios that can be achieved via investments such as venture capital, private equity, direct (angel) private investment in start-ups and emerging private and operating cash-flow businesses, private real estate, private debt, franchises, as well as publicly traded emerging growth companies, (long volatility) option strategies, and other highly-specialized investment strategies that may be employed by some hedge funds, managed futures, and market-timers.
This definition implies a potentially broad universe that allows the advisor/investor considerable discretion in identifying constituent PAO opportunities in the HPT sub-portfolio mandated to pursue capital appreciation. Advisor practitioners seeking to implement HPT will tend to exercise such discretion based on a number of factors, such as their access, due diligence skills, and core beliefs with respect to the viability of certain PAO asset classes, strategies, or products. As the moniker Venture Populist implies, I am an unabashed advocate of private investment in private ventures due to the decisive historical performance of venture capital and private equity as an asset class and its proven role of being the greatest source of private wealth.
