The Science —
At RiverFront, we know that Price Matters® RiverFront’s Dynamic Investing approach is powered by the ‘science’. By science we mean we develop and use proprietary asset management and optimization models that look well beyond short-term market volatility and into a horizon of long-term investment. Our models, and the data they provide, allow us to focus our sight on multi-cycle forecasts of the major asset classes that extend up to 10 years.
Why is this important? Because we know, based on extensive analysis of historical return rates, there is a strong relationship between the price paid for an asset at the beginning of an investment period and its return over the next 5-10 years. Simply put, assets priced well above the historical trend tend to produce below average returns and those priced below the trend tend to provide above average returns.
Source: RiverFront Investment Group, calculated based on data from CRSP 1925 US Indices Database ©2016 Center for Research in Security Prices (CRSP®), Booth School of Business, The University of Chicago. Data from Jan 1926 through May 2019. It is not possible to invest directly in an index. Large Cap Universe used in the charts is defined by CRSP based on market capitalization. CRSP Stock File Capitalization Decile Indices are calculated for each of the Stock File Indices market groups. In these Market Segment Indices all securities (excluding American Depositary Receipts) on a given exchange or combination of exchanges are ranked according to capitalization and then divided into ten equal parts each rebalancing period. The largest securities are placed in portfolio 10 and the smallest in portfolio 1.
The Three Factors
As long-term market values ebb and flow, our models capture and adjust to the constant movement; that’s why we call it—Dynamic Investing. Via our proprietary Price Matters® model, we use long-term price and total return data to produce projected estimates of return. We know equities and commodities models are driven by the price of the asset class relative to its long-term trend (Price Matters®) and that fixed income models are driven by beginning yield (Yield Matters, too). Both models include estimates of investment risk correlation and best and worst case returns. Also known as capital market assumptions (CMAs), these 3 factors are combined with our assessment of the macroeconomic environment to produce critical modeling inputs.
Defining the proper balance between client return objectives and risk tolerance is fundamental to our asset management philosophy. That’s why we build optimization tools that define risk the way our clients do—risk means losing money. Our models determine the probability of losing money by using a worst case potential returns scenario (calculated by our Price Matters® framework) then measuring the probability of losing money for every asset class at four distinct periods of time. By defining risk like a client we’re considering and combining 3 critical elements:
- short-term market volatility
- multiple time horizons and,
- price, relative to long-term trend.
Our overriding objective is to optimize assets by combining classes with the highest potential return, subject to a lower probability of loss, across a client’s specified investment horizon. The longer the horizon, the greater the probability below average prices will result in above average returns. And because downside risks increase as prices rise and decrease as they fall, the RiverFront optimization process automatically creates a ‘buy low/sell high’ investment strategy discipline.
RiverFront’s Price Matters® discipline compares inflation-adjusted current prices relative to their long-term trend to help identify extremes in valuation.
The information above applies to RiverFront Investment Group Asset Allocation Portfolios only.
RiverFront is owned primarily by its employees through RiverFront Investment Holding Group, LLC, the holding company for RiverFront. Baird Financial Corporation (BFC) is also a minority owner of RiverFront Investment Holding Group, LLC and therefore an indirect owner of RiverFront. BFC is the parent company of Robert W. Baird & Co. Incorporated (“Baird”), a registered broker/dealer and investment adviser.
- RiverFront’s Price Matters® discipline compares inflation-adjusted current prices relative to their long-term trend to help identify extremes in valuation.
- Mean reversion is the tendency of a variable, such as a stock price, to converge on an average value over time.