Portfolio Q&A with Ibbotson Associates

MikeGarrison (2)TradeKing Advisors offers diversified investment portfolios that are designed and monitored by Ibbotson Associates, Inc., a registered investment adviser and part of Morningstar’s Investment Management Group. This week Brent Jones of TradeKing Advisors sat down with Mike Garrison CFA, CFP®, Senior Investment Consultant, to discuss the history behind Ibbotson Associates, as well as their process behind the construction and ongoing oversight of the portfolios offered by TradeKing Advisors.

Who is Ibbotson and what’s your history?

In the early 1970’s at the University of Chicago, a junior Finance faculty member, Roger Ibbotson, and an MBA student with portfolio management experience, Rex Sinquefield, observed that there was no generally accepted way to estimate the excess return that compensates investors for taking on relatively higher risk in the equity markets. These two scholars devised a simple yet compelling idea to compute the returns for stocks, bonds, and cash and calculate the differences between these asset classes to reveal the excess returns for taking more risk.

Their analysis led to the publication of Stocks, Bonds, Bills, and Inflation® (SBBI Yearbook) in 1976 and the birth of Ibbotson Associates. For more than 35 years, our investment management process has been built on a foundation of investment philosophies derived from decades of award winning research*.  In 2006, Ibbotson Associates was acquired by Morningstar, Inc., a recognized provider of independent investment research and products, and became part of the Morningstar Investment Management group, which includes Morningstar, Inc.’s U.S. registered investment advisors. Today Ibbotson is a well-known authority on asset allocation, manager selection, and portfolio construction services; with a mission to deliver innovative asset allocation solutions to help investors reach their financial goals.

The Morningstar Investment Management group has investment professionals across the world that help build and manage our solutions. Our investment professionals, several of whom have an advanced degree (Ph.D. or MBA), CFA designation, or some combination, have, on average, more than a decade of industry experience. Additionally, 10 Graham and Dodd Awards have been granted by the CFA Institute for financial writing based on research by current or former employees of Morningstar, Inc. or its subsidiaries*.  We provide investment advisory services to some of the largest asset managers, insurance companies, banks, broker dealers, and retirement plan providers in the U.S., Europe, and Asia.

What is Ibbotson’s investment philosophy?

Ibbotson’s investment philosophy is founded in asset allocation. We believe the asset allocation policy is the most important determinant of a portfolio’s risk and return characteristics over time. When we construct a portfolio, our goal is to take advantage of diversification benefits over the long run. Furthermore, our asset allocation portfolios are designed to benefit from historical asset class market anomalies, and we have put in place overweights (or “tilts”) aimed to enhance long-term performance, increase returns, lower return volatility, and increase inflation protection. For example, in equity asset classes, we overweight based on size and value premiums (small-cap over large-cap and value over growth). Additionally, our Momentum portfolios are designed to take advantage of the momentum market anomaly.

Could you summarize Ibbotson’s investment management process?

We have a 5 step investment management process:

  • 1)       Build our capital market assumptions
  • 2)       Determine the strategic (Core) or tactical (Momentum) asset allocation
  • 3)       Analyze the Exchange-Traded Product universe
  • 4)       Construct the portfolio
  • 5)       Monitor the portfolio

Step 1: Capital Market Assumptions

Our Capital Market Assumptions (CMAs) are the core for all of our models. Using long term historical data, we forecast long term return and volatility for different asset classes. We also project the correlation relationships among asset classes. These CMAs are the inputs we use going forward to help create our portfolios.

Step 2A: Strategic Asset Allocation

Based on the inputs developed in Step 1, we combine the asset classes to create strategic asset class allocations. Our strategic allocations contain between 10-20 asset classes including stocks, bonds, commodities, and real estate.  We run different types of optimizations to determine what the optimal asset class combinations and weightings should be for each target risk level. For TradeKing Advisors’ Core portfolios, we have five different risk levels ranging from conservative to aggressive growth. As an investor moves up the risk/return spectrum the portfolio stock/fixed income ratio increases with the highest equity percentage in the aggressive growth model and the most fixed income in the conservative model.

Step 2B: Tactical Asset Allocation 

Our Momentum portfolios are designed to capture the market anomaly of momentum, which we define as the tendency of investments to show persistency in their patterns of returns.  Research** has shown that stocks or asset classes that have outperformed over the last 6-12 months are likely to continue to outperform in the short term.  For our Momentum portfolios, we run our propriety algorithm to determine the appropriate allocation for each target risk level.  Next we evaluate market data over a 12 month period, using a model we developed to signal a buy or sell decision at the asset class level.  Lastly we examine a broad set of 20 asset classes that exhibit momentum characteristics and overweight the asset classes with the most positive momentum signals and underweight the asset classes with the most negative signals.  Like the Core portfolios, we have created five target risk levels for TradeKing Advisors’ Momentum portfolios, ranging from conservative to aggressive growth.

Step 3: Analyze Exchange Traded Universe

The liquidity and low fees make Exchange-Traded Products (ETPs) a natural fit for our portfolios. We evaluate and screen hundreds of Exchange-Traded Funds (ETFs) and Exchange-Traded Notes (ETNs) for potential inclusion in the portfolios.   We create a customized style benchmark for each ETP to be included in the portfolios.  Before an ETP makes it into a portfolio, we examine its cost, tracking error, consistency, and other qualitative and quantitative factors.

Step 4: Portfolio Construction 

We use ETPs to construct the portfolio of investment options that serves as the optimal representation of the strategic and momentum asset class models.

Step 5: Monitor Portfolios 

We review the asset allocation of the Core portfolios quarterly and the Momentum portfolios monthly. The Momentum portfolios are more sensitive to market trends, which may shift quickly, so we need to review the momentum allocations more frequently. We are monitoring the managers and funds in the portfolios on an ongoing basis and periodically re-screen the manager universe.


Special thanks to Mike Garrison CFA, CFP® with the Morningstar Investment Management group for contributing to this Q&A session. For more information regarding these portfolios or about TradeKing Advisors, please visit our website at

TradeKing Advisors, Inc. has chosen Ibbotson Associates, Inc., a registered investment advisor and wholly owned subsidiary of Morningstar, Inc., to provide portfolio construction, asset allocation, and monitoring services for the TradeKing Advisors portfolios. Ibbotson Associates is not acting in the capacity of an investment advisor to individual investors. Ibbotson Associates is not affiliated with TradeKing Advisors, Inc.
The Morningstar Investment Management group of Morningstar, Inc. includes Ibbotson Associates, Morningstar Associates, and Morningstar Investment Services, all registered investment advisors and wholly owned subsidiaries of Morningstar, Inc.
 *Awards were granted by Graham & Dodd for financial writing based on research of current of former employees of Morningstar, Inc. or its subsidiaries. Stocks, Bonds, Bills and Inflation: Updates 1979, International Equity and Bond Returns 1982, The Demand for Capital Market Returns: A New Equilibrium Theory 1984, Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance? 2000, Long-Run Stock Returns: Participating in the Real Economy 2003, Human Capital, Asset Allocation, and Life Insurance 2006, Why Fundamental Indexation Might-or Might Not-Work 2008, The Importance of Asset Allocation 2010, The ABCs of Hedge Funds 2011, The Liquidity Style of Mutual Funds 2012.
**Source: Jegadessh and Titman. “Returns to Buying Winners and Selling Losers: Implications for Market Efficiency.” Journal of Finance 48, 65-91 (1993). Fama, E.F. and French K.R. “Mutlifactor Explanations of Asset Pricing Anomalies.” Journal of Finance 51 (1996).


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