iSectors Post-MPT Allocations White Paper

iSectors Post-MPT Allocations White Paper Executive Summary

iSectors® Post-MPT Allocations
Improved Application of Modern Portfolio Theory
By Vern Sumnicht MBA, CFP

  • Modern Portfolio Theory (MPT), published in the late 1950’s, contains what are considered the core scientific principles of investing.
  • Post-Modern Portfolio Theory (Post-MPT) is the science of investing published since the 1950’s.
  • Principles of Post-MPT are used to improve upon the way MPT has traditionally been applied to managing investment portfolios.
  • iSectors® Post-MPT Allocation strategies use the investment principles of MPT and Post-MPT to manage investment portfolios.
  • Some of the problems Post-MPT has identified with the traditional approach to asset allocation called mean variance optimization (MVO) are:
    • The need to determine expected returns
    • Standard deviation as a measure of risk
    • Diversifying among highly correlated asset classes
  • iSectors® Post-MPT Allocations do not use expected return, standard deviation or correlated asset classes to determine asset allocation.
  • iSectors® Post-MPT Allocations use a completely objective, quantitative, repeatable and scalable approach to optimize and monthly re-optimize portfolio allocation.
  • iSectors® also uses advances in computer technology and the availability of index-based exchange-traded funds to reduce the cost of investing, increase liquidity, and improve transparency.

Modern Portfolio Theory

Profound improvements in the science of investment portfolio management.

More than fifty years ago, in 1959, Harry Markowitz, one of the founding fathers of modern portfolio theory, published Portfolio Selectioni. The work on modern portfolio theory won Markowitz his share of a Nobel Prize. Merton Miller, along with Harry Markowitz and William Sharpe, were awarded the 1990 Nobel Prize in Economics for research on theories of “financial economics.”ii

It would be difficult to overstate the influence of MPT’s core principles on the manner in which investments are managed today. For insights into principles of portfolio management derived directly or indirectly from the research of Miller, Markowitz, Sharpe and their colleagues, see Exhibit A.

Post-Modern Portfolio Theory research on investment management since the 1950s

Post-Modern Portfolio Theory, including research in Behavioral Finance, has pointed the way to applications and technologies that can improve investment results and catapult the principles of MPT to a new level of usefulness. A sample of the research and Principles from Behavioral Finance can be found in Exhibit B.

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