In a video from Exchange 2023, New Frontier Advisors CIO and partner Robert Michaud spoke to VettaFi about portfolio optimization.
“[New Frontiers] was founded on this idea of a better way to optimize portfolios, how to optimize and have well-diversified portfolios for an uncertain future,” Michaud said. “What we have done is we have built a variety of risk targeted portfolios that span many different asset classes and do an effective job of diversifying risk and capturing return.” Michaud noted that New Frontiers was one of the first ETF strategists.
Portfolio Optimization in the Current Market Environment
According to Michaud, the rising rate environment of 2022 has been a huge driver of change. “It’s particularly notable for shorter duration, some of the least risky securities, now have some of the highest return.” Back when the video was recording in February, Michaud noted that short duration had returns that kept even with higher risk strategies.
“What we do is we’re always thinking about the whole portfolio.” From a portfolio optimization standpoint, Michaud sees this as an opportunity to shift the risk away from riskier fixed income. This allows investors to take the easier win in short duration, and put the risk back on the equities side. Investors can then capture possible upside in riskier securities there.
Lessons from 2022
Speaking to lessons from 2022’s turbulent markets, Michaud said, “you have to have a very dynamic understanding of risk.” Paying attention to broader market information and building it into your portfolio to properly manage risk is critical.
How to Use ETFs for Portfolio Optimization
“In the early days of ETFs, they were used for their liquidity,” Michaud said. As the wrapper as evolved, Michaud thinks that the transparency of the product has been highly useful. He observed that ETFs can be used in precise, tax efficient ways to meet portfolio goals.
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