Firm’s Research Concludes That Optimizing for Diversification Outperforms Traditional Risk Approach
Online PR News – 01-October-2009 – – DENVER, CO–Gravity 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.
About Gravity Investments
Gravity Investments, the worldwide leader in Diversification Intelligence, is a leader in financial engineering and investment technology. A Denver-based firm, Gravity’s Gsphere Portfolio Analysis Platform bridges the gap between traditional asset allocation and diversification optimization, providing clients an unparalleled ability to manage and market investments. For more information on Gravity Investments please visit www.gravityinvestments.com or call 866-373-8489.