RMI US Scores 9 to 3

Like other anomalies, I remember the year ending in ‘5’ anomaly of 2005. The “anomaly” was that year ending in ‘5’ tend to be positive. It was last trading day which nudged the year to positivity. I think it was 31 Dec, which moved up 67 points and put the otherwise sideways year into glory. “Yeah it’s a green”, news byte. This is why few believe that 2015 is going to be stellar. So as the saying goes, “As goes Jan goes the year”. For an active money manager it could be “as goes the year, goes the portfolio”. This is a general positive or negative tendency of the portfolio, not really outperformance or underperformance.
Active money deserves a lot of flak it gets, as it tends to tag, piggy back, rather than stand up on its own. This is why you won’t hear many active performances talking about outperformance vs. S&P500. “It’s tough to beat a bull, bear markets anyway destroy wealth”. Active money is a cry baby.  How many times did you hear this in your newsletter, “market conditions were not helpful”.
Ok! We too are the new kids on the block, claiming to have a superior active approach. Ok! We have limited audited real money history. But what we have, which other Active’s lack, is a framework, which works across assets, across markets, across risk preferences. When something this scalable can be created, it gives us courage to talk about it to the industry and our other Active peers, “you can do it too”, “alpha can be generated without piggy backing”, “low correlation portfolios are possible from the same universe”, “portfolios can perform in all market scenarios”.
Well! This is a journey, and only time will tell how happy money will be licensed under RMI. But at this point of time, just like RMI Toronto we had a real money good year on RMI US too. The real money did lag behind, as the portfolio size was 30. We are introducing Active Version (3) shortly with just 10 stocks. All our Active models may be limited at 10 component size. So coming back, RMI US 30 model delivered another positive outperformance as it inched above the S&P500.
Again this is no great shakes, as it’s Active’s task to outperform. But when we have a secular bull, an active strategy designed to capital conserve is not prepared to just buy and hold. Any sensitive exits, costs it alpha. The reason RMI could still beat S&P 500 despite being active was because of the superior selection framework. Even if the model was designed to last an average 40-60 days holding period per component, it selected just 30 stocks out of 500 stocks. This is a large universe to make superior selections.
An outperformance was the minimum expectation from the model. On average RMI US 30 was up 8% more than the S&P 500 on an annualized basis. This was at a marginal lower volatility. And with this year under its belt, the RMI beats the S&P 500 9 times in 12 periods. We don’t know of any other potential open source models which do this. But having said that, 1% outperformance on an Active compared to the benchmark is a bit below expectation. We are learning, improving our systems, comprehending and training them back. But we can give it to the RMI. It’s like a child, we can’t get upset with him (her). He (she) did what best it could do. And we are happy about that. Have a great Christmas.