William P. Jennings

Eta® Analysis of Portfolios:The Economy Matters

The authors introduce a macroeconomic factor model, the Eta model, and its various applications. The underlying message regarding the Eta model, be it for replication, wealth maximization, or wealth preservation, is that “the economy matters.” The core feature of the Eta model is its replication methodology, from which portfolios could be customized to fit the risk–reward preferences of investors with respect to the economy. They then evaluate the portfolios against the Dimensional Fund Advisors Core Equity 1 Portfolio, which adopts the methodology promoted by the Fama–French three-factor model.

Portfolio Optimization Strategy for Concentrated Portfolios: Models and Time Horizons

Recent academic literature has noted that high conviction, or concentrated, portfolios (i.e., those with approximately 15 or fewer assets) often outperform larger, theoretically better diversified, portfolios. Recent research has also suggested that some of the gains from traditional portfolio optimization are in fact from the selection of relatively lower volatility stocks through the optimization process. To help wealth managers navigate the new uncertainty in the academic literature, the authors conduct a large-scale test of four approaches to portfolio construction that could be applied to high conviction portfolios. This study found that the traditional mean–variance-optimization approach worked well with very small portfolios but that a minimum Black Swan risk portfolio worked better when more holdings were included in the portfolios. The authors discuss the results and possible implications for winning approaches for wealth management.