Firm’s Research Concludes That Optimizing for Diversification Outperforms Traditional Risk ApproachGravity Investments (Gravity), a premier financial engineering firm responsible for the Gsphere visual asset allocation platform, today issued a paper on portfolio optimization and the comparative value of optimizing specifically for diversification.The paper, entitled How True Diversification™ Preserves Capital, concluded that optimizing portfolios for diversification provides a positive impact to bear market returns at entirely no cost to bull market returns, resulting in dramatically better performance across a full market cycle. Diversification, not risk, is thus warranted according to Gravity as the focus of portfolio optimization for asset allocation.“We’ve known for some time that True Diversification is a primary enabler of achieving higher returns,” said James Damschroder, Founder of Gravity Investments and the firm’s chief financial engineer. “Now we know precisely why. With True Diversification, there really is such a thing as a free lunch.”Gravity conducted research on 95 actual Registered Investment Advisor portfolios in place between the years 2002 and 2009. The firm examined the portfolios across three time periods--bull market, bear market, and the full cycle, grading each portfolio--using Gravity’s proprietary diversification measurement.IPC, Gravity’s patented measurement of diversification, produces the weighted average of all unique correlations in a portfolio and provides a measurement of diversification specifically tuned to systematic risk. Gravity calls this advancement in the science of diversification measurement and optimization “True Diversification”.The results of Gravity’s research indicated that every extra percent of IPC was responsible for protecting 98 basis points of capital in a down market. By comparison, similar changes in standard deviation showed a much weaker relationship to returns in both bull and bear markets.“Based on these results, it’s reasonable to infer that the traditional practice of using a Markowitz efficient frontier as a menu of portfolios may be of dubious merit,” says Damschroder. “It’s hard to argue the logic of True Diversification when it protects capital in down markets without sacrificing gains in up markets.”Gravity’s innovative approach to portfolio construction will benefit virtually every sponsor of investment product, including broker/dealers, RIAs, insurance companies, mutual fund companies, hedge funds, pension plans, bank trust groups, 401(k) providers, fund consultants, family offices, foundations, and endowments.
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Grail Advisors, a leader in the development and distribution of active Exchange Traded Funds (ETFs), today announced the registration of four new actively-managed ETFs--RP Growth ETF, RP Focused Large Cap Growth ETF, RP Technology ETF, and RP Financials ETF. The new offerings represent the industry’s first traditional actively-managed ETFs using a single-manager approach. New York-based RiverPark Advisors, LLC (RiverPark) will serve as the primary sub-adviser for each of the funds. Wedgewood Partners, Inc., of St. Louis will also serve as sub-adviser to the RP Focused Large Cap Growth ETF. “One of our goals from the outset was to bring traditional, active fund managers to the ETF marketplace,” said William M. Thomas, CEO of Grail Advisors LLC. “With these four new RiverPark offerings, that day has come, and it’s come a lot sooner than even the most enthusiastic proponent of the ETF structure could have imagined.” Grail unveiled the market’s first true, actively-managed equity ETF last month—the Grail American Beacon Large Cap Value ETF—and will follow up this summer with the Grail American Beacon International Equity ETF, the first international ETF of its kind. Those funds were designed to incorporate the traditional investment management approach and a multi-manager format into an active ETF structure. The single-manager RiverPark funds will take active ETFs a step further. The funds will be designed to combine all the benefits of an ETF structure—lower costs, tax efficiency, transparency of holdings, and intra-day trading—with actively-managed strategies from a veteran asset management team. RiverPark will provide day-to-day portfolio management services to RP Growth ETF, RP Technology ETF, and RP Financials ETF, and, in conjunction with Grail, oversee the day-to-day portfolio management services provided by Wedgewood to RP Focused Large Cap Growth. RiverPark was founded in 2006 by Morty Schaja, CFA, who serves as the firm’s Chief Executive Officer, and Mitchell Rubin, CFA, who is the Chief Investment Officer. All of RiverPark’s principals, including Mr. Schaja, Mr. Rubin, and portfolio manager Conrad van Tienhoven, came to the firm from Baron Funds. RiverPark has assembled a prestigious group of outside advisors to support the senior team in the management of the funds. David A. Rolfe, CFA, will be the portfolio manager of RP Focused Large Cap Growth ETF. Mr. Rolfe is the Chief Investment Officer of Wedgewood, and together with Anthony L. Guerrerio, the firm’s CEO and founder, has worked on various large-cap growth strategies for the firm since its inception in 1992. Each of the funds’ managers will have the discretion on a daily basis to choose securities for the ETF’s portfolio consistent with the ETF’s investment objective. Unlike index-based ETFs that seek to replicate the holdings of a specified index, each of the new Grail ETFs will use an actively-managed investment strategy to meet its investment objective. All four of the funds’ holdings will be fully disclosed on a daily basis. “We fully embrace the movement toward full transparency, continuous liquidity, and a low-cost fee structure,” said Mr. Schaja from RiverPark Advisors. “In today’s environment, investors are demanding a superior vehicle in which to make their investments without having to sacrifice access to world-class portfolio management. We’re thrilled to be on the cutting edge of this evolution with Grail.” Trading for shares the new ETFs is expected to begin September 1 on the NYSE Arca, Inc. The new funds will represent the latest in what is anticipated to be a series of offerings of the Grail Advisors ETF Trust. The San Francisco-based firm intends to make the benefits of ETFs available to the large pool of investors who currently select traditional mutual funds or other vehicles to access active portfolio management. Mr. Thomas says Grail Advisors is currently in discussions with a number of leading financial institutions and asset managers and expects to launch more customized, actively-managed ETFs this year.
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