Investment Decisions for my Mom and More Performance Statistics

I've been reviewing the information a new manager we hired for my Mom sent me about potential investments. He has a small firm that invests in the US based in the country where she lives. We have so far given his firm about 9% of her assets. At the moment the money is all in a money market account. But now he wants to know whether after the recent small decline in the markets we want to invest in stocks. I'm going to recommend to do so but to start with $100k and then invest $8-$10k each month over the next year in the same investment. I think it is likely that the stock market will decline further this year, but I can't be sure. As I don't think stock valuations are excessive, the Fed is likely to cut interest rates, and inflation is contained, I don't think any stock market decline will be pronounced. Therefore, I'm recommending this dollar cost averaging (DCA) approach. She has plenty of cash and bonds in other accounts and only has about a 15% allocation to long-only stocks at this point. When this investment is complete she'll have about 25%. I am also recommending to invest with Aletheia Research and Management. This is the kind of manager I love - their alpha is 15% or so though the growth account also has a high beta. It isn't the kind of investment your typical pf-blogger likes as the expense ratio (paid as a "wrap fee") is rather outrageous (3% I think). The minimum investment is $100k which is why we can't just DCA all the way.

While I was reading the information on these separately managed accounts I came across an interesting performance statistic - down capture ratio and up capture ratio. These statistics are the fraction of the market gain a manager captures in months when the market rises and vice versa. It is easy to compute in an Excel spreadsheet. The Aletheia Large Cap Growth Managed Account reports an up ratio of 1.65 and a down ratio of 0.47. This is a very impressive asymmetry. According to Alexander Ineichen, asymmetric returns are the hallmark of hedge-fund like performance. So of course I computed my ratios for the last 36 months: 1.22 up and 0.71 down. Not bad. It wasn't always that way :) The asymmetry is increasing over time. In my early days of investing the asymmetry went in the opposite direction!



Following my discussion yesterday with Rich Gates and BackOfficeMonkey (love the handle!) I took another look at the correlations of my returns (since October 2002) with several other assets and managers. As I knew already, my largest correlation is with the MSCI World Index. I have a small negative correlation with the TIAA Bond Market Fund and a small positive correlation with the Australian Dollar. I estimated a regression against all these factors and only the beta on the MSCI World Index was statistically significant. If I had the data to hand I'd do a more sophisticated analysis, but the point is that the MSCI is not a bad benchmark.