Windham Labs Insights

Insights 2018-04-11T12:39:16+00:00

Windham Insights Series

Asset Allocation Defined

April 6th, 2018|

If you’ve ever sought to learn more about investing or financial planning, you have probably come across the term “asset allocation” more than a few times, in a lot of conflicting ways. You've probably read it in a long, complicated article that didn't actually define what asset allocation is, which was likely followed by a few not-so-subtle suggestions on where you can find the “best allocation for you” and where to invest your (or your clients) hard-earned money. Here, we seek to answer the very simple question: What is asset allocation? Why is it important? What is asset allocation? [...]

Breaking Down Modern Portfolio Theory

March 29th, 2018|

The year is 1952. Roughly 4.2% of the United States population is invested in the stock market1, and majority of the country views investing as a way for affluent individuals to gamble with their ample means. The Fed lifted the cap on interest rates one year prior, and stocks are now outperforming bonds by 25 percentage points2. Index investing has yet to regain popularity since the crash of 1929, and international investing is nonexistent. Meanwhile, 25-year old Harry Markowitz is putting together his doctoral thesis and comes across an idea that will (over time) change the landscape of finance [...]

Portable Alpha

January 11th, 2018|

The conventional approach to building investment portfolios, which relies on the typical hierarchy of investment decisions, imposes constraints on active management. Under most circumstances, these constraints are unnecessary and produce mean-variance inefficient portfolios. By using portable alphas, managers can strike an efficient balance between alpha and beta exposures to create mean variance-efficient portfolios for their clients. Portfolio managers can take advantage of a new approach to portfolio composition designed to eliminate inefficient constraints by using portable alphas. Portable alphas allow managers to strike an efficient balance between active and passive exposures to create mean-variance efficient portfolios. What are alpha [...]

Risk Regimes

October 16th, 2017|

Risk Regimes It has been shown time and time again that volatilities and correlations are unstable. Depending on the sample used to estimate them, they may differ significantly—which can lead investors to underestimate their exposure to loss, and to form portfolios that are not sufficiently resilient to turbulent markets. To better manage risk, we propose a methodology for partitioning historical returns into distinct samples that are characteristic of quiet and turbulent markets. By separating these samples, investors can: Stress test portfolios by evaluating their exposure to loss during turbulent conditions Structure portfolios that are more resilient to turbulent markets [...]

The Hidden Cost of Active Management

August 10th, 2017|

Investors are well aware of the incremental transaction costs managers incur as they seek to replace securities perceived to be overvalued with those perceived to be undervalued. Moreover, it is no secret that active funds charge much higher fees than passive funds designed to track market indexes. What investors may not be as aware of, however, is that there is a hidden cost associated with most active funds. The typical active fund is more than 90% correlated with the market, yet their relatively high active management fee is applied not only to the fund’s active component, but to its [...]

The Windham Labs Guide to Asset Allocation [Infographic]

August 1st, 2017|

With index funds now providing full access to global markets, a thoughtful asset allocation approach is more important than ever. Windham makes it painless to meet your clients investment goals while managing their unique constraints. Let this infographic be your guide to a comprehensive asset allocation strategy.  Want to learn more about asset allocation? Download our Whitepaper! Asset Allocation Whitepaper

Time Diversification

July 31st, 2017|

Time Diversification As mentioned by Windham CEO Mark Kritzman in Episode #51 of the Meb Faber Show, time diversification is the common assumption that investing over the long-term is safer than investing over shorter periods. For example, suppose you were going to buy a house in three months and needed to pay $100,000 in cash. In the meantime, would you be more inclined to invest that amount in a riskless asset, such as a Treasury bill, or in a risk asset, such as an S&P 500 index fund? Alternatively, suppose you wanted to buy that house in 10 years. How [...]

Defining an Asset Class

April 13th, 2017|

Defining an Asset Class Asset allocation is one of the most important decisions faced by investors, however there are no universally accepted criteria that define exactly what an asset class is. Some investments take on the status of an asset class because managers feel that investors are more inclined to allocate funds to products if they are defined as an asset class, rather than merely as an investment strategy. Alternatively, the investment industry tends to overlook investment categories that legitimately qualify as an asset class because investors are reluctant to defy tradition. What are the [...]

Factor Methods: Part Two

March 21st, 2017|

In the first part of this series, we discussed how to perform factor analysis and the challenges that come with it. Catch up here. CROSS-SECTIONAL REGRESSION ANALYSIS As we learned in the first post, factor analysis reveals covariation in returns, and challenges us to identify the sources of covariation. Cross-sectional regression analysis, on the other hand, requires us to specify the sources of return and challenges us to affirm that these sources correspond to differences in return. We proceed as follows. Based on our intuition and prior research, we hypothesize attributes that we believe correspond to differences in stock [...]

Factor Methods: Part One

March 16th, 2017|

Financial analysts are concerned with common sources of risk that contribute to changes in security prices, called factors. By identifying these factors, analysts may be able to control a portfolio’s risk more efficiently, and perhaps even improve its return. This post will discuss the first of two common approached used to identify factors. The first, called factor analysis, allows analysts to isolate factors by observing common variations in the returns of different securities. These factors are merely statistical constructs that represent some underlying source of risk (which may or may not be observable). The second approach, called cross-sectional regression [...]