National Post

The power of the ‘agnostic portfolio’

- Barry Critchley

Over l unch, Christophe Roehri, deputy chief executive of TOBAM, a Paris- based money manager, presents a straightfo­rward message: market cap indexes are not very efficient.

As a corollary, he argues investors can do better than the market, with a “maximum diversific­ation strategy,” which he says is the best way to produce excess returns.

And that strategy, or at least the methodolog­y behind the investment process, has resulted in the firm receiving patents in Australia, Japan and the U.S.

To illustrate his central point, Roehri displays a graph of the S& P 500 index showing which sectors have dominated (in terms of market weight) over the past 55 years.

Technology i s now the dominant sector; a decade earlier it was the financials; at the turn of the new millennium it was technology, media and telecom; 35 years back it was the energy producers; and 45 years ago it was autos.

“The benchmark indexes tend to be poorly diversifie­d,” he said, noting when stocks become “expensive,” their weight in the index increases, meaning investors are required to buy more. ( When stocks are cheap, the opposite situation prevails.)

“If you buy the benchmark, you are betting on (continued) concentrat­ion.”

TOBAM, which is home to “lots of maths guys,” has developed its own meas- ure of diversific­ation, the diversific­ation ratio, the measure for which it received patents.

In simple terms, diversific­ation is achieved when the risk of the combinatio­n of the stocks in a portfolio is less than the combinatio­n of the risks of the stocks in the portfolio.

( The idea is to add stocks to the portfolio provided that diversific­ation is increased.) The diversific­ation ratio results from dividing the combinatio­n of the risks by the risk of the combinatio­n.

The result of all the math is what Roehri calls an “agnostic portfolio,” one, he said, that is free of bias and made without forecasts or bets. ( The portfolio is rebalanced each quarter.)

But caps and minimum weights are placed on the number of stocks in the portfolio: for the U. S. product, the maximum weight is 1.50 per cent; for the Canadian product the cap is three per cent.

On a back- tested basis, Roehri said TOBAM’s approach, across a number of markets, generates an excess return of one per cent to three per cent — and a reduction in volatility of 1520 per cent — relative to the benchmark. ( A cynic would say there’s never been a bad back-test.)

He says maximum diversific­ation differs from a socalled “smart beta” strategy and a low volatility strategy.

“We are a little bit of everything,” adding TOBAM should be a “core portfolio” for investors.

Roehri is in Canada as part of a marketing effort to attract retail investors. Last year TOBAM and Mackenzie Investment Partners signed a deal where a series of ETFs based on the former’s Maximum Diversific­ation Index Series would be launched. Those efforts have resulted in about $ 150 million of assets.

That partnershi­p was establishe­d after TOBAM secured mandates ( totalling US$ 1.5 billion) from a number of Canadian institutio­ns.

“We created a company in 2005 around a concept. Institutio­nal investors are the best investors to buy a concept. And there are a lot of large, sophistica­ted institutio­nal investors in Canada,” he said.


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