Clients are shocked to see how undiversified their portfolios actually are

December 1, 2009 — 4:37 AM UTC by Brooke Southall

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Ted Schwartz began using a new software product designed to look under the hood of a portfolio and see if each holding is sufficiently different from the others to moderate losses in a downturn without sacrificing the upside too much.

It happened just in time.

The president of Capstone Investment Financial Group of Colorado Springs, Colo. employed use of Gsphere, a “diversification” software that analyzes stocks to determine whether they are truly uncorrelated or just look that way, just before the market began its final swan dive a year ago. Gsphere is made by Gravity Investments of Denver, Colo. and was founded by James Damschroder. He explains the importance of diversification in an article called: Why diversification is still the go-to risk killer

Making sure his company’s holdings fit the Gsphere concept of diversification has already paid big dividends for Schwartz.

“It probably allowed us to reduce losses in client portfolios by half” during the downturn, he says. Schwartz is about one in 100 users of the software, according to the company.

But one veteran user warns that the software program — for all its powers — depends on the advisor making good choices about how to use it.

“A major point is the time frames you choose to us,” says George Gay, CEO of First affirmative Financial Network, which manages about $600 million from Colorado Springs, Colo. For instance, if you had surmised in March that the market was heading up and you plugged in the 1996-2000 time frame, you would have done far better than if you chose another, less bullish stretch of years.

Gsphere may be the first software to bill itself as a “diversification” software and the labeling is indicative of how it varies from the competition, Swartz adds.

“There have been portfolio optimization tools before but the problem with all that is that anything you’re using is rear-view rather than forward-looking,” he says.

Swartz likes how the computer expresses itself, too.

“It’s a graphic depiction of non-correlation,” he says.

But it’s still not as simple as paint-by-numbers, according to Gay.

“It’s a complex program,” he says. “It’s a combination of art and science that you learn over time. It’s not out-of-the-box.”

Yet First Affirmative will continue to look for ways to expand its use and it finds the price tag of about $1,000 a month to be well worth it, Gay says.

Hyper-geek

Besides its ability to analyze a portfolio in hyper-geek fashion, Gsphere pays for itself in another way, according to Schwartz.

“It’s a great asset in a sales presentation,” he says. “It shows clients where things are and why it might not be the best portfolio.”

Some of the findings are counterintuitive, Schwartz adds.

“You might have five holdings that do a better job of diversification than a portfolio of 30 holdings,” he says.

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Stephen Winks said:

December 2, 2009 — 2:45 PM UTC

ARE THE SKILLS OF THE ADVISOR THE SAME AS A MONEY MANAGER?

The industry in large part has not been very effective in its support of portfolio construction. To resolve the “hyper geek” consideration in securing superior client results, many large practices have sucessfully executed a functional division of labor in the form of a highly structured CIO and CAO functions in support of the advisor. The CIO function makes the continuous comprehensive counsel required for fiduciary standing, possible. Gsphere would be just one of many tools a practice’s CIO would use to achieve superior results. The question is how does every advisor avail themselves to such capabilities and still habve time to win and serve clients. The answer for smaller advisors is to paerticipate in a centralized CIO function offered by their B/D or created by their OSJ. This would solve a lot of problems and would be responsive to the distinctly different skill sets of sales, administration and portfolio construction essential for an advisors success in a terribly demanding business environment.

SCW


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