Rehmann Financial Alpha Model
The Alpha Model focuses on combining very unique strategies that have each found
different paths to success. The goal of most strategies included in the Alpha
Model is to consistently outperform the broader market regardless of what
capitalization or investment style is in favor. They have each identified
particular inefficiencies in the market that can be measured and utilized for
the benefit of their clients. When considered individually, these strategies are
often underused as many investors are not sure what portion of a portfolio
should be allocated to them due to their unique approaches. The Alpha Model is
intended to overcome this obstacle by combining these types of strategies into
one allocation. The resulting portfolio provides strategic diversification yet
allows each manager the freedom they need to outperform the general market.
Unfortunately, the investment community is often quick to classify equity
strategies as either "growth" or "value" and encourages money managers to focus
on companies of a particular size and deem their strategies either "domestic" or
"international." This makes it easier for the public to enlist a "fill in the
squares" approach to asset allocation. Should a "small-cap value" manager need
to be replaced, one just needs to analyze similarly classified managers in order
to fill the void. While this approach can be successful, it assumes that all
investment strategies easily fall into one of the plainly labeled categories. In
fact, there are many investment strategies that focus on metrics that result in
portfolios that are not easily classified. Furthermore, as time goes by, many of
these disciplines may call for investment in companies of different sizes and
nationalities. The managers would not be deviating from their methods, but
investors who use a style-box approach to allocation could mis-label them as
"drifters" who are not to be used in allocations. In fact, as areas of
investment gain and lose attractiveness, it would seem that strategies that
recognize these shifts and adjust portfolios accordingly would be very valuable.
Unlike the style-box approach to asset allocation, adjustments are made to the
Alpha Model that seek to profit from shifts in the investment markets.
Rehmann Financial BIRD Model
The BIRD models are intended for those investors who appreciate both the
strategic discipline of the IRD models and the tactical approach of the
Behavioral models. Modern portfolio theory serves as the foundation of these
models yet they are flexible enough to allow increased exposure to areas of the
market that are in favor. While these models will usually have exposure to both
growth and value, large and small companies, and international and domestic
firms, they will implement significant overweights/underweights in these sectors
when appropriate.
IRD Model
IRD portfolios are built using a core and satellite approach that divides the
portfolio into two distinct groups of holdings. The core holdings are the
sectors, styles, and managers that the Investment Research Department (IRD)
believes should be consistently held in most portfolios over longer time
horizons. Additional value is then sought by adding satellite positions either
through managers that the IRD believes can add unique value or through specific
sectors or styles that may be positioned to provide excess returns given current
and expected economic conditions. While many factors can come into play when
deciding what satellite positions, if any, should be incorporated into the
portfolio, the core allocation is driven by the Black-Litterman approach to
asset allocation with emphasis placed on a targeted Sortino Ratio.
Behavioral Model
The Rehmann Financial Behavioral Investment Model has been developed to gain a
unique, macro-level perspective on repeated historical patterns in investor
behavior. The model's concept is simple: effectively anticipate when undervalued
sectors are being "recognized" by the market masses as early in the buying trend
as possible. By identifying buying trends earlier, sectors can be focused on
through the use of targeted index ETFs.
The managers of Rehmann's Behavioral Model break the market down into "3
battles" when doing their analysis: International vs. Domestic, Growth vs.
Value, and Large Companies vs. Small Companies.
Rehmann Financial Behavioral Model
The goal of the Rehmann Financial Behavioral strategy is to identify and use
repeated historical patterns in investor behavior from a macro level. The
managers of Rehmann Financial's Behavioral strategy break the market down into
"3 battles" when doing their analysis: international vs. domestic, growth vs.
value, and large companies vs. small companies. The model attempts to determine,
at an early stage, when undervalued sectors are being recognized by the market
masses. The managers of the strategy will then overweight the portfolio to these
sectors.
Each sector of the stock market spends time in each of the following categories,
but at different points and degrees:
- Undervalued and out of favor.
- Undervalued and in favor.
- Fairly valued
- Overvalued and in favor.
- Overvalued and out of favor.
It may take a number of years for a sector to move through all of the
categories. By using both fundamental and technical analysis, the Rehmann
Financial Behavioral strategy attempts to pinpoint when a sector has moved from
one category to another and position portfolios accordingly. The strategy is
very systematic and takes emotion out of the investment process by seeking to
identify when to overweight or underweight a sector. Investors using this
solution should understand that at certain times, the equity allocations of
these models may be entirely growth or value oriented. In addition, as much as
90 percent of the equity allocation of these models could be invested in large
companies and as much as 60 percent could be invested in small companies.
Furthermore, up to 65 percent of the portfolio could be invested in foreign
securities while as much as 85 percent could be invested in American companies.
The Rehmann Financial Behavioral strategy attempts to add value by "listening to
the market" as opposed to telling it where to go. While many managers position
portfolios in areas believed to be undervalued with the hope that the market
will eventually realize the opportunity, the Rehmann Financial Behavioral
strategy seeks to identify value and recognize when the market has finally
decided to react. Once market leadership appears to shift in favor of the
undervalued area, the portfolio will reposition accordingly. The process is
clear and unemotional. At any given time the strategy is trying to answer three
questions regarding equities: International or Domestic? Growth or Value? Large
Cap or Small Cap?
Rehmann Financial Investment Research Department (IRD) Model
The IRD Models are ideal for investors who appreciate an investment strategy
that leverages modern portfolio theory, yet is flexible enough to adapt to
current market conditions and environment.
IRD portfolios are built using a core and satellite approach that divides the
portfolio into two distinct groups of holdings. The core holdings are the
sectors, styles, and managers that the Investment Research Department (IRD)
believes should be consistently held in most portfolios over longer time
horizons. Additional value is then sought by adding satellite positions either
through managers that the IRD believes can add unique value or through specific
sectors or styles that may be positioned to provide excess returns given current
and expected economic conditions. While many factors can come into play when
deciding what satellite positions, if any, should be incorporated into the
portfolio, the core allocation is driven by the Black-Litterman approach to
asset allocation with emphasis placed on a targeted Sortino Ratio.
Black-Litterman
The Black-Litterman model was developed by Fischer Black and Robert Litterman.
The model combines two main approaches towards modern portfolio theory, the
Capital Asset Pricing Model (CAPM) and Harry Markowitz's mean-variance
optimization theory. A key component of the process takes into consideration the
current and historical market capitalization rates of specific sectors to assist
in determining that sector's expected future return. This process is a
combination of both forward looking assumptions and historical valuation that
results in an allocation that is firmly based on traditional analysis, yet
allows portfolio managers to incorporate their own expectations of the market
and economy.
The Sortino Ratio
The Sortino Ratio is the other key factor taken into account when determining
the core allocation of the IRD models. Frank A. Sortino developed his namesake
ratio in an effort to differentiate between upside and downside volatility.
Standard deviation does not consider there to be an increased value in upside
volatility and can understate the risk by rewarding consistent downside
performance while the Sortino Ratio more appropriately values these situations.
The Sortino ratio is similar to that of the Sharpe ratio, except that it uses
downside deviation in the denominator instead of standard deviation and Minimum
Acceptable Return as the target instead of the market return. Thus, the ratio is
the actual rate of return in excess of the investor's target rate of return, per
unit of downside risk.