Portfolio management is risk management. Successful investment strategies develop a process to answer the questions of when to allocate to certain assets, how to identify which assets to choose from, and how to best combine the chosen assets into a portfolio.
Our team at PMV has spent years researching answers to these questions and developing models to test our hypothesis. These are our findings:
PMV strategies are based on the recognition that momentum trends exist in financial asset prices. At its most basic form, momentum describes the effect when recent positive (or negative) performance of an asset makes it more likely that the return in the next period is also positive (or negative). It is easy to intuitively understand this concept by simply looking at the graph of an asset’s returns over time, and observing the persistent trends, either up or down, that become apparent.
To illustrate, PMV’s unique Momentum Indicator has been applied onto a chart of the S&P500, persistent positive and negative trends become evident. PMV’s Momentum Indicator is backward looking – it does not know what prices or returns are coming next. The goal is simply to identify a trend when it develops and continue with that trend for as long as it persists. Therefore, initial losses will be realized before a negative trend develops, and initial gains will be forgone until a positive trend develops.
Time Period: January 2, 2015 – January 2, 2021. Source: Morningstar Direct – S&P 500 TR. Historical prices for illustration purposes only. The above chart is provided for illustrative purposes only and should not be construed or relied upon as actual performance. It is not intended to represent the returns of any of PMV Fund, model, or account. No transaction charges, management fees, or other expenses are deducted, all of which would reduce performance.
As long as markets are irrational, we expect momentum in asset prices to continue, and therefore have a high degree of confidence that our strategies will continue to perform as expected.
The Global Investment Universe
By carefully selecting our Global Investment Universe, we have the flexibility to perform in many different types of market environments. A small group of macroeconomic factors are responsible for a majority of asset class returns. It does not take a large investment universe to access broad market trends. Most importantly, the assets in our Universe have historically low-to-negative correlation with each other. This means when one asset exhibits negative momentum trends, another asset is likely to exhibit positive momentum trends, and vice versa.
US Large Cap Equities
US Small Cap Equities
International Developed Equities
Emerging Markets Equities
US Long-Term Treasury Bonds
Short-term Investment Grade Bonds and/or Cash
The success of our strategy does not solely depend on stock prices going up. We have the potential to perform if there is positive momentum in at least one asset class.
Utilizing Momentum to Determine Positions
When a momentum trend develops, it is likely to persist for some time. This is the result of the underlying market factors that are responsible for returns in the various asset classes. For example, when the economy is growing, global stocks are likely to exhibit positive momentum trends. When the economy is weak, central banks are lowering interest rates as stimulus, and bonds are likely to exhibit positive momentum trends. When inflation is strong, gold is likely to outperform.
The above heatmap is intended to illustrate the existence of momentum trends. For example, asset classes with strong relative momentum tend to stay ranked near the top for several months, while asset classes with weak relative momentum tend to stay near the bottom for several months. Momentum is calculated using an internal system developed by PMV
Instead of naively holding a small weighting to each asset class over time, our goal is to concentrate only on those assets showing the strongest momentum trends in the current market environment.
Once we have identified the asset classes showing the strongest momentum in our Global Investment Universe, we need a process for combining those asset classes at various weightings into a portfolio. This process is known as portfolio construction.
Our process attempts to build a portfolio with the highest return-to-risk ratio through maximizing diversification. To illustrate, let us assume US Large Cap equities and Long-Term US Treasuries have strong positive momentum. Risk can be reduced through diversification, without sacrificing returns, by creating a portfolio of these assets, approximated by the dotted line below.
Time Period: April 1, 2010 –May 31, 2013. Source: Morningstar Direct –Portfolio statistics calculated against the S&P 500 TR. US Treasuries comprised of BBgBarcUS Treasury 20+ YrTR. Hypothetical portfolio growth for illustration purposes only.The above chart is provided for illustrative purposes only and should not be construed or relied upon as actual performance. It is not intended to represent the returns of any of PMV Fund, model, or account. No transaction charges, management fees, or other expenses are deducted, all of which would reduce performance.
The goal of every strategy should be to maximize return for the risk taken. This is best achieved through utilizing the only "free lunch" in investing - Diversification. Contrary to popular belief, diversification does not come from the number of positions that are held. Diversification is achieved through the relationship, or correlation, between the positions.
While it is impossible to control for all variables in portfolio management, our focus on addressing the most important drivers of risk provides confidence that our strategy will ultimately produce the results our investors expect.
THIS INFORMATION IS NOT INTENDED TO BE RELIED UPON AS THE BASIS FOR AN INVESTMENT DECISION, AND IS NOT, AND SHOULD NOT BE ASSUMED TO BE, COMPLETE. NO ONE SHOULD CONSIDER INVESTING IN A FUND WHO IS NOT, EITHER ALONE OR TOGETHER WITH SUCH INVESTOR’S FINANCIAL ADVISERS, FINANCIALLY SOPHISTICATED AND CAPABLE OF EVALUATING THE MERITS AND RISKS OF AN INVESTMENT. ALL PROSPECTIVE INVESTORS IN ANY FUND OFFERED BY PMV OR ITS AFFILIATES (EACH A “FUND”) MUST, AT A MINIMUM, MEET THE FINANCIAL SUITABILITY STANDARDS FOR “ACCREDITED INVESTORS” UNDER APPLICABLE SECURITIES AND EXCHANGE COMMISSION (“SEC”) REGULATIONS. CERTAIN INFORMATION CONTAINED IN THIS DOCUMENT HAS BEEN OBTAINED FROM SOURCES OUTSIDE OF PMV. WHILE SUCH INFORMATION IS BELIEVED TO BE RELIABLE FOR THE PURPOSES USED HEREIN, NEITHER PMV NOR ANY OF ITS RESPECTIVE AFFILIATES, ASSUMES ANY RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF SUCH INFORMATION AND SUCH INFORMATION HAS NOT BEEN INDEPENDENTLY VERIFIED BY PMV OR ANY OF ITS RESPECTIVE AFFILIATES.
The examples herein are provided for illustrative purposes only and should not be construed or relied upon as actual performance. None of the graphs or charts represent actual portfolios or models managed by PMV and do not represent returns during a time when actual client funds were invested, rather, they are hypothetical examples to illustrate techniques used by PMV and have inherent limitations. Actual portfolios, models, and Funds will have materially different results. PMV was not managing money during some periods depicted in the charts and graphs. No charts, graphs, or formulas depicted herein should imply, directly or indirectly, that such device can be used to determine which securities to buy or sell or be used as a determining factor in deciding whether to invest with PMV. Performance of ETFs, indexes, and other securities reflect the reinvestment of dividends and other earnings. Performance of PMV techniques do not.
The volatility and return of indices may materially differ from that of any PMV strategy, technique, or Fund. In addition, securities traded will differ significantly from the securities that comprise the indices. Indices have not been selected to represent an appropriate benchmark to compare PMV’s performance, but rather, as is industry convention, is disclosed to allow for comparison to that of a well-known and widely recognized index.
No client should assume that the future performance of any specific investment or strategy will be profitable or equal to past or hypothetical performance. All investment strategies, including all of PMV’s strategies, have the potential for profit or loss. There can be no assurance that PMV will achieve comparable results as those presented herein, that the returns generated by any PMV portfolio or Fund will equal or exceed those of other investment options, or that PMV will be able to implement its investment strategy or achieve its investment objective. Fund objectives, generally, are to generate returns with minimal correlation to other asset classes through trading in debt and equity securities and derivatives.
This material has been prepared or is distributed for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Funds may be speculative and involve a substantial degree of risk and may use leverage and engage in other speculative investment practices that may increase the risk of investment loss. An investor must realize that he or she could lose all or a substantial amount of his or her investment in any Fund.
The information contained herein is qualified in its entirety by the important information in each Funds’ Private Placement Memorandum, agreement of limited partnership, and the subscription agreement related thereto, copies of which are available upon request and must be reviewed before purchasing a limited partnership interest in a Fund.