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Moby-Markets

“Thar she blows!” “Where away?” “Three points off the lee bow, sir.” “Raise up your wheel. Steady!” Illustration: I.W. Taber. Source: Wikipedia It’s easy to become obsessed. Melville’s famous novel Moby-Dick describes Captain Ahab’s obsession with a giant albino sperm whale. On a previous voyage, the white whale had bitten off Ahab’s leg, leaving him with a prosthesis. Ahab goes on a mission of revenge, casting his spell over the rest of the crew. His fanaticism robs him of all caution. In the end, Moby-Dick destroys the ship and drags Ahab to the bottom. When you’ve suffered a loss in the market, the best thing to do is to put it behind you. Sometimes it’s because the nature of the economy has changed. Sometimes there was an unexpected development – new management, or some external factor. Sometimes you simply miscalculated. Whatever the reason, it’s important to understand that markets are forward-looking. They take current circumstances and future expectations and try to discount all the expected cash-flows to a present value. That’s what market prices represent. Click to enlarge S&P 500 for the last 2 years. Source: Bloomberg So when they move significantly, it’s because the outlook is different. A stock doesn’t know that you own it, and it certainly doesn’t care what the price was when you bought it. Investors can get obsessed with “getting out even.” But that’s a mistake. The only reason to worry about where you bought a stock is to manage your tax-liability. In the midst of the conflict, Ahab was given a final chance to give up his fanatical quest, but he rejects this – to his doom. Investors need to be sure they’re thinking and planning rationally – and not obsessively.

Asset Values And Valuation

What’s a stock worth? “The market is overvalued.” “No, it’s fair.” “No, you’re missing the point – the economy has changed.” “What? Are saying it’s different this time?” “It’s always different.” Arguments over stock-market valuation have been around ever since stocks have traded. In many ways, the purpose of an open stock market is to discover what the clearing price for a company should be – what price satisfies both the buyers and sellers of a company’s shares. But just knowing something’s price doesn’t tell you what it’s worth. As Warren Buffett is fond of saying , “price is what you pay, value is what you get.” There are two general ways to value an asset: bottom-up, fundamental analysis that focusses on the present value of expected cash flows; and top-down, relative-value analysis that looks at the entire market and the range of investment alternatives. The first examines a specific company; the second evaluates an entire industry – or even the whole economy. Any economic asset generates cash over time. This cash flow can be forecasted, and the results discounted to present value. With bonds, this is fairly straightforward; the cash-flow is contractual. With stocks earnings can be more volatile, but they can also grow over time. We compensate for this by increasing the discount rate. Lower risk means a lower interest rate. Net present value formula. Source: Wikipedia The top-down approach looks at any asset and asks, “Compared to what?” So we use various financial ratios – price/earnings, price-to-book, enterprise value over free cash flow. With bonds, we focus on the “spread” – their level of yield above comparable risk-free government bonds. By checking what else is out there – playing the field – investors can see how what they own looks relative to everything else. Map of S&P 500 PE ratios. Source: Financial Visualization Both methods have their merits: bottom-up analysis generates an intrinsic value – something that is fairly stable over time. Top-down valuation looks at the range of investment alternatives. No investment, after all, is an island. But folks who only focus on bottom-up analysis can get distracted by the details and miss the forest for the trees. Top-down studies can be too volatile: the world may always be changing, but it doesn’t change that much from day to day. And human nature never really changes. Financial analysis tries to answer the question of what an asset is really worth. It’s a good question. In the end, though, a stock is only worth what someone else is willing to pay for it.

New Janus Mutual Fund Uses Tail Risk Analysis

Summary JAGDX is a global allocation fund (70/30) which uses tail risk analysis to mitigate risk. The Fund inception was in June 2015, and it has gotten off to a rocky start. But it may be worthwhile to track this fund to see how they manage a full market cycle. Overall Objective and Strategy The primary objective of the Janus Adaptive Global Allocation Fund (MUTF: JAGDX ) is to provide investors total return by dynamically allocating its assets across a portfolio of global equity and fixed income investments, including the use of derivatives. The fund attempts to actively adapt to market conditions based on forward looking views on extreme market conditions (both positive or negative) with the goal of minimizing the risk of significant loss in a major downturn while still participating in the growth potential of capital markets. On average, the fund provides 70% exposure to global equities and 30% exposure to global bonds (70/30 allocation). But the fund has the flexibility to shift this allocation and may invest up to 100% of its assets in either asset class depending on market conditions. Because of this, JAGDX will likely have above average portfolio turnover compared to other funds. The portfolio managers use two complimentary processes: a “top down” macro analysis and a “bottom-up” risk reward analysis. These processes use proprietary models which seek to identify indicators of market stress or potential upside. These models include an options-implied analysis that monitors day-to-day movements in options prices for indicators of risk and reward between asset classes, sectors and regions. Top-Down Macro Analysis: Focuses on how the Fund assets will be distributed between global equity and fixed income. They use a proprietary options implied information model, among other tools, to monitor expected tail gains and losses across the equity and fixed income sectors and adjust as necessary to mitigate downside risk exposure. Bottom-Up Risk Reward Analysis: Designed to identify underlying security exposures in order to maximize exposure to securities which will realize tail gains while minimizing exposure to securities expected to provide tail losses. Within the Fund’s equity positions, the managers will adjust sector, currency and regional exposures away from market cap weightings based on their evaluation of expected tail loss and gain. Within the Fund’s fixed income positions, they will adjust the credit, duration and regional exposures using the same analysis. The fund managers measure both extreme positive and negative movements known as expected tail gain (ETG) and expected tail loss (ETL). Portfolio construction is driven by the ratio of ETG to ETL, while targeting a desired level of portfolio risk with the goal of maximizing future total return. For more information on expected tail loss, take a look at this Wikipedia page on Expected shortfall . (click to enlarge) Source: rieti.go.jp Fund Expenses The Fund offers several classes of shares. JAGDX is available without a 12b-1 charge, but only if you buy the fund directly from Janus. The expense ratios for some of the share classes are listed below: JAGDX (Class D Shares): 1.01% JVGIX (Class I Shares- Institutional): 0.82% ($1 million minimum) JVGTX (Class T Shares): 1.13% (available on brokerage platforms) JAGAX (Class A): 1.07% (front-end load 5.75%) JAVCX (Class C Shares): 1.82% (deferred load 1%) Minimum Investment JAGDX has a minimum initial investment of $2,500. Past Performance JAGDX is classified by Morningstar in the “World Allocation” or IH category. The fund had unfortunate timing when it was first issued on June 23, 2015. As of the end of the third quarter it had dropped by 9%, although it has recovered a bit since then. It is still very early, but so far the Fund is lagging its peers. 1-Month 3-Month JAGDX +1.18% -4.16% Category(IH) +1.37% -3.89% Percentile Rank 61% 66% Source: Morningstar Mutual Fund Ratings The fund is too new to have a Lipper or Morningstar rating. Fund Management The fund is managed by two individuals: Enrique Chang: Chief Investment Officer, Equities and Asset Allocation. Joined Janus in September 2013, and has previously worked for American Century and Munder Capital Management. Holds a BS in Mathematics from Fairleigh Dickinson and a master’s degree in finance/quantitative analysis and statistics and operations research from NYU. Ashwin Alankar, PhD: Global Head of Asset Allocation & Risk Management. Joined Janus in August, 2014 and has previously worked for AllianceBernstein and Platinum Grove Asset management. Holds a BS in chemical engineering and mathematics and a master of science degree in chemical engineering from MIT. He also holds a PhD in finance from the University of California at Berkley Haas School of Business. Comments Tail risk hedging is designed to enhance return potential by: Helping to mitigate losses when a market storm hits. Provide liquidity in a crisis, allowing you to buy assets at distressed prices when others are forced to sell. Allow investors to take greater risks elsewhere in their portfolios. But as with any market timing strategy, there is always the possibility of market “whipsaws,” where markets trade up and down in a sideways pattern for extended periods and tail risk hedging may become an extra expense instead of a benefit. JAGDX has gotten off to a rocky start, but they have an interesting approach to risk management, and I will be tracking the fund to see how they do over a full market cycle. So far, they have attracted about $50 million in assets, so it is still uncertain whether the fund will be a long term success.