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Fund Success and Assurance Frontiers

Martin L. Leibowitz and Stanley Kogelman
The Journal of Portfolio Management November 2021, jpm.2021.1.294; DOI: https://doi.org/10.3905/jpm.2021.1.294
Martin L. Leibowitz
is president of Advanced Portfolio Studies LLC and a senior advisor for Morgan Stanley in New York, NY
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Stanley Kogelman
is president of Delft Strategic Advisors LLC in Mount Kisco, NY
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Abstract

Investment fund investment strategies and asset allocations typically are based on a multiplicity of complex (possibly competing) goals that often are incorporated in a simple return target. The challenge is to develop a portfolio whose expected return at least equals the target but has a volatility less than a disaster-avoidance risk limit. However, such a goal-matching return only provides a 50/50 chance of success. Truly important goals may require a higher probability of success, such as 60%. This article focuses on efficient portfolios and the return they can provide with a specified probability of assurance. The key step is to map the efficient frontier into an assurance frontier that plots risk-adjusted returns with a 60% success probability. This frontier typically has a peak return that is the highest available risk-adjusted return. In some cases, this peak portfolio is at the risk limit. In other cases, even with a monotonically rising efficient frontier, the peak may fall well below the maximum volatility limit.

Key Findings

  • ▪ Portfolios with expected returns that just match a goal-based target may have only a 50/50 assurance of success (even after those targets have been properly revised to account for, e.g., inflation, fund expenses, and geometric effects).

  • ▪ Portfolios that have the best risk-adjusted return can sometimes be found at a volatility that is well short of a fund’s maximum risk limit.

  • ▪ Longer horizons generally lead to higher peak returns that can enhance prospects of success.

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The Journal of Portfolio Management: 48 (8)
The Journal of Portfolio Management
Vol. 48, Issue 8
Emerging Markets 2022
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Fund Success and Assurance Frontiers
Martin L. Leibowitz, Stanley Kogelman
The Journal of Portfolio Management Oct 2021, jpm.2021.1.294; DOI: 10.3905/jpm.2021.1.294

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Fund Success and Assurance Frontiers
Martin L. Leibowitz, Stanley Kogelman
The Journal of Portfolio Management Oct 2021, jpm.2021.1.294; DOI: 10.3905/jpm.2021.1.294
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  • Article
    • Abstract
    • SUMMARY: FUND GOALS AND TARGET RETURNS
    • FROM BASIC TARGETS TO EFFECTIVE TARGETS
    • TARGET LINES
    • THE SUCCESS FRONTIER
    • THE PEAK SUCCESS PROBABILITY
    • THE ASSURANCE FRONTIER
    • HORIZON EFFECTS
    • CONCLUSIONS
    • ACKNOWLEDGMENT
    • REFERENCES
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