Commodity-trading pioneer Peter Matthews has co-founded a new firm with a unique way to pare risk and maximize gains in ETF portfolios

SATURDAY, JANUARY 4, 2014

A Star Trader’s New Approach to ETF Diversification

By MIKE HOGAN  | MORE ARTICLES BY AUTHOR

Commodity-trading pioneer Peter Matthews has co-founded a new firm with a unique way to pare risk and maximize gains in ETF portfolios.

Sure, diversification is an important aspect of creating a successful long-term portfolio. But that doesn’t mean investors have to watch stoically as assets lose value at certain times, according to the founders of an interesting new Web-based money manager, PJMint.Co-founded by Peter Matthews, who helped create a very profitable commodity-trading advisory that pioneered systematic trading systems in the 1980s, the firm applies quantitative analysis to ideas inspired by modern portfolio theory. Diversification is a key tenet of MPT, stating that by holding varied assets, say bonds and stocks, an investor can reduce risk in his overall portfolio because the assets’ prices don’t always move in the same direction. But Matthews, whose original firm, Mint Investment Management, was featured in the popular book Market Wizards, takes a more active approach, lightening positions that have lost momentum.

Matthews and his spouse, Jacqueline Ko Matthews, a money manager and former Goldman Sachs banker, say their online system (pjmint.com) will reduce risk in their all exchange-traded-fund portfolios. Subscribers can mix and match various combinations of traditional and quant-based strategies. A free investment simulator lets them see how each allocation would affect portfolio performance over time, and displays its risk-and-reward characteristics, including total return and volatility (risk), compared with benchmarks like the Standard & Poor’s 500 index.

Subscribers who “activate” an allocation can have PJMint make the needed trades with funds residing at select discount brokers that so far include Charles Schwab (schwab.com) and Interactive Brokers (interactivebrokers.com). PJMint never takes possession of subscriber funds, nor does it have any discretionary trading powers. Its algorithm automatically buys and sells based on rules generated by a subscriber’s portfolio choices.

“It takes both the emotion and delay out of portfolio management,” explains Peter, who serves as chief investment officer. The system selects proxies for six or seven asset classes from among the 250 largest and most liquid ETFs worldwide, which, typically, also are the cheapest.

Besides broker and ETF fees, PJMint charges a maximum annual fee of 2% for its minimum, $5,000 portfolio; the costs fall to 1% for portfolios of $500,000 or more. Rival online portfolio managers Betterment (betterment.com) and Wealthfront (wealthfront.com) charge less than 1% to oversee more traditional strategies.

PJMINT SUBSCRIBERS who don’t want to stray from mainstream strategies can select from three “buy and hold” portfolios that use more standard statistical measures to fine-tune asset allocations offering the highest reward for the lowest risk. By PJMint’s measures, however, these portfolios are the most volatile.

“If MPT is what they want, we offer it,” says CEO Jacqueline, who helped run the $200 million family office for Virginia’s U.S. Senator Mark Warner. Both Matthews disparage MPT as the “old paradigm” of buy and hold.

The Matthews consider MPT’s principal risk co-efficient—standard deviation—an inadequate measure of investor pain. They insist investors’ wealth is far more sensitive to drawdowns—the dollars lost during the declines in any asset’s price.

Instead, PJMint’s “defensive” portfolios use algorithms that identify when a holding begins trending down. Those funds are moved to cash until the trend reverses—avoiding losses and, hopefully, enhancing long-term returns.

Its “opportunistic” portfolios take a different tack, reallocating funds monthly to the 20 ETFs worldwide with the best price trends. In addition to funds like Vanguard Total Stock Market ETF (ticker: VTI) that mirror asset classes, sector proxies like Health Care Select SPDR (XLV) are used in this rotation. Neither the defensive nor opportunistic strategies aim to keep the original asset allocation via rebalancing—selling rich shares buy cheap ones.

PJMint’s principals don’t believe any money manager can consistently identify where stocks and indexes will go. They would rather ride an uptrend until the algorithms suggest it’s weakening, and err on the side of caution by selling.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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