Elm Partners employs dynamic index investing to optimize risk-adjusted returns by combining long-term expected return based on valuation metrics with a momentum overlay.
Elm Partners emphasizes the importance of explicitly considering risk in financial decisions and offers tools to assist clients in making risk-adjusted choices aligned with their financial goals.
Elm Partners' approach combines value and momentum metrics to capture return-chasing rallies and manage risk during market downturns, providing a comprehensive investment strategy.
Deep dives
Dynamic Index Investing for Wealth Preservation and Growth
Elm Partners, a money management firm, employs dynamic index investing to preserve and grow wealth over time. By combining long-term expected return based on valuation metrics with a momentum overlay, Elm adjusts equity exposure based on market conditions. This approach aims to capture return-chasing rallies and protect against market downturns. While passive indexation is generally effective, Elm's strategy allows for more active asset allocation to adapt to changing market dynamics. By focusing on long-term expected returns, diversification, cost control, and tax efficiency, Elm seeks to provide a better risk-adjusted return for investors.
The Significance of Momentum in Asset Allocation
Momentum, often referred to as the mother of all anomalies, plays a crucial role in asset allocation decisions. Elm Partners recognizes the importance of combining long-term valuation-driven expected returns with momentum metrics in forming their investment strategy. This approach leverages periods of return-chasing and market dynamics to adjust equity exposure. While traditional approaches focus on passive value investing or stock picking, Elm's dynamic index investing approach combines value and momentum to optimize risk-adjusted returns. By identifying periods when valuation and momentum deviate, Elm adjusts portfolio weightings, aiming to capture profitability with reduced risk.
Navigating Risk and Uncertainty in Financial Decision-Making
Elm Partners emphasizes the need to bring risk explicitly into the decision-making process when it comes to financial choices. By maximizing expected utility rather than expected wealth, Elm addresses the interaction between investment risk and spending patterns. Their research dives into long-term consumption and portfolio choice, focusing on decisions related to spending, tax implications, and intergenerational wealth transfers. Elm provides tools and calculators to assist clients in making risk-adjusted decisions that align with their financial goals, ensuring a comprehensive approach to investing and wealth management.
The Role of Value and Momentum in Investment Strategies
Value and momentum are two powerful factors in investment strategies, and Elm Partners explores the interaction between these metrics. They acknowledge that, historically, value and momentum strategies have shown a negative correlation, where one may outperform when the other lags. Elm's approach combines the long-term expected return based on valuation metrics with a momentum overlay, enabling adaptive asset allocation. While value metrics identify undervalued securities, momentum strategies capture medium-term performance trends. This combination offers a comprehensive investment approach, capable of capturing return-chasing rallies and managing risk during market downturns.
Bringing Simplicity and Transparency to Investment Management
Elm Partners offers a transparent and simplified approach to investment management, utilizing dynamic index investing. By focusing on broad indexes that cover a significant portion of the market, Elm aims to provide investors with a clear and straightforward strategy. Their approach integrates long-term expected returns, diversification, cost control, and tax efficiency to optimize risk-adjusted returns. With a commitment to providing accessible and effective investment solutions, Elm enables investors to navigate market challenges, adapt to changing dynamics, and preserve and grow their wealth over time.
Graduating from the London School of Economics in the mid 80’s, Victor Haghani set sail on a career in the fixed income markets. Joining Salomon Brothers and assuming a position in bond portfolio analysis, Victor became steeped in the math of bond markets and derivatives and part of a team that sought to conquer markets with science. He was among those who joined John Meriwether in the founding of Long Term Capital Management in 1993 and as a Partner experienced directly both the early spectacular success and the ultimate failure of the fund. Our conversation considers the lessons – on market liquidity, reflexivity, and trade sizing as well as the vulnerability of relative value trades to errant correlation assumptions. By 2002, Victor took up the “the case of the missing billionaires”, wondering why there were so few now given that so many individuals had over a million dollars a century ago. He set out on a journey of inquiry focused on finding an asset allocation strategy that could preserve and grow wealth over time. Today, that work has come to life at Elm Partners, an asset management vehicle that Victor founded in 2011 and serves as CIO of. We discuss the premise of Elm – that passive indexation is generally effective but can be improved upon. In this context, Elm employs “dynamic index investing”, looking beyond market cap weighting to incorporate economic fundamentals like earnings yield and factors like value and momentum. With this approach, Victor and team hope to avoid busts that periodically occur while remaining exposed to the market such that wealth can compound over time. I hope you enjoy this episode of the Alpha Exchange, my conversation with Victor Haghani.
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