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Resolve's Gestalt University

May 10, 2019

Mark Kritzman graduated with a business degree in a time of intense crisis and change in financial markets, and this experience shaped the arc of his career. He has dedicated his professional life to the study of asset allocation and portfolio optimization and his papers on these and other topics have earned over a dozen top awards in finance, including nine Bernstein/Fabozzi/Levy Awards.

This conversation between ReSolve’s CIO Adam Butler and Mark is loosely guided by core themes from Mark’s newest book, “A Practitioner’s Guide to Asset Allocation”. Mark describes why he embraces Samuelson’s Dictum and how this has motivated his focus on asset allocation as the most fertile ground for active returns. Relatively small traders can drive mis-priced securities back to equilibrium but asset classes can – and do – stray far from equilibrium because traders lack the capital necessary to correct mis-pricings on their own. This is exacerbated by other barriers to arbitrage like institutional tracking error constraints and benchmark-oriented incentives.

Given Mark’s views it’s not surprising that his team at Windham Capital focuses mostly on Tactical Asset Allocation. He expresses the view that the policy portfolio concept is profoundly misguided since markets have highly unstable distributions. Dynamic markets imply that optimal portfolios should change over time in response to changes in expected return, risk and correlation dynamics.

Mark makes the case that portfolio optimization gets a bad rap but that most of the protests are disingenuous. Sure, out-of-the box optimization is error-maximizing on portfolio weights but that’s irrelevant for a few simple reasons, most prominently because no one with any sense would use an optimizer out-of-the-box, but also because while small changes in portfolio estimates might lead to large changes in weights, the expected mean and variance of the portfolio would hardly change at all. We address the 1/N arguments and Mark makes clear why they’re bunk.

We cover a lot more ground but toward the end Mark divulges that he’s publishing a new paper with mind-blowing implications. I won’t give away the plot here…

Mark has forgotten more about finance than most investors will learn in their career. Put down what you’re doing and listen to this right now.