Seeking Real Portfolio Diversification?
White paper — Diversifying with the Defined Risk Strategy
Swan Research — Innovative Thought Leadership
As investors seek portfolio diversification in an era of index investing, a number of indices are often considered when considering exposure different asset classes. The first question is which indices or asset classes are appropriate. But a deeper question lingers, are the indices diversified themselves?
The Dow Jones Industrial 30 average, with its numerous shortcomings is used less and less as a broad proxy for the overall market. These days the go-to benchmark for stock market performance is the S&P 500 index. But how much of “the stock market” does the S&P 500 really cover?
The S&P 500 is a market-capitalization weighted index of 500 U.S. based companies, selected by a committee to broadly represent the U.S. economy. Since the index is cap-weighted there is definitely a large-cap bias to it. The top 10 names out of 500 make up 17.61% and the top 25 names equate to 32.53% (Source: Morningstar Direct. As of 12/29/2015). By design, the S&P 500 does not include small cap companies or non-U.S. based firms.
Does that matter?
Certainly from a portfolio construction standpoint it seems logical that an investor would desire to have as many “tools in the toolbox” as possible. Intentionally limiting one’s opportunity set to only large cap U.S. investments seems narrow-minded and self-defeating.
The next question becomes, how best to invest across different asset classes and indices?
With that in mind, Swan Global Investments is bringing the Defined Risk Strategy to small cap and international stocks.
Expanding the Tool Set — Portfolio Diversification Across Multiple Asset Classes
Swan Global Investments has been managing the Defined Risk Strategy (“DRS”) for over 18 years. With the DRS, Swan believes it has an excellent investment solution that is transparent, repeatable, and scalable.This solution seeks to actively address the biggest threat investors of all types have in meeting their goals, namely, the devastating impact that bear market sell-offs have on an investor’s wealth. Traditionally applied to U.S. Large Cap stocks, the DRS successfully navigated two major bear markets and numerous short-term corrections since 1997.
In order to provide a more complete solution, Swan is looking to apply the benefits of the DRS to a wide range of additional assets.
This paper explores that initiative. It starts with a review of the existing DRS’s goals, track record, and methodology. Once established, both the logic of applying the DRS to additional assets and the practical implications of such an effort are discussed.
Blog Post — Expanding the Opportunity Set