Tailor-made thematic portfolios: a core satellite optimization. (English) Zbl 1443.91266
Summary: In recent years, thematic exchange-traded funds have arisen and broaden the narrow thinking of purely monetary driven investment decisions. Ethical concerns, a stronger belief in society-shaped trends, or the conformity with personal convictions motivate investors to include non-monetary objectives in so called thematic funds. Thematic investors follow a modified core satellite strategy in which conventional funds ensure diversification. Investors’ non-monetary interests manifest within additional satellite funds. Both portfolios are separately allocated so that inter-portfolio correlation effects are not considered and inefficient core satellite portfolios are allocated. However, in order to reduce the inefficiency of such a core satellite strategy, this study addresses fund providers and develops the idea of tailoring thematic funds to conventional ones. An empirical investigation shows that by easing the efficiency constraint for the satellite portfolio, correlation effects between the portfolios can be exploited. At the expense of an average relative volatility increase of 4.55%, the inefficiency of core satellite portfolios can be reduced by an average of 11.74% compared to volatilities of efficient tri-criterion portfolios. Further analysis of these thematic products shows that tailored products can also be more concentrated within a given theme. This opens up new opportunities for fund providers to become more involved in various thematic trends and at the same time achieve better performance for core satellite investors.
MSC:
| 91G10 | Portfolio theory |
References:
| [1] | Markowitz, H., Portfolio selection, J. Finance (1952) · doi:10.2307/2975974 |
| [2] | Anand, P.; Cowton, Cj, The ethical investor. Exploring dimensions of investment behaviour, J. Econ. Psychol. (1993) · doi:10.1016/0167-4870(93)90007-8 |
| [3] | Marchioni, U., Antropova, S., Thomson, C., McNaught, C., Schwaiger, K.: Megatrends. An index approach to thematic investing (2016). https://www.ishares.com/uk/individual/en/literature/brochure/ishares-megatrends-thematic-investing-en-gb-rc-end-investor.pdf. Accessed 14 Nov 2017 |
| [4] | Giammattei, G., Global Megatrends: Capitalizing on Tomorrow’s Trends Today (2014), Boston: RBC Global Asset Management (U.S.) Inc., Boston |
| [5] | Sironi, P., FinTech Innovation. From Robo-advisors to Goal Based Investing and Gamification. Wiley Finance Series (2016), Chichester: Wiley, Chichester |
| [6] | Zopounidis, C.; Niklis, D.; Doumpos, M., Doumpos, M.: “Financial decision support”. Feature issue editorial, EURO J. Decis. Process. (2018) · doi:10.1007/s40070-018-0080-9 |
| [7] | Bérubé, V.; Ghai, S.; Tétrault, J., From indexes to insights: the rise of thematic investing, McKinsey Invest., Winter 2014/15, 1, 51-56 (2014) |
| [8] | Forster, G., On theme, Superfunds Mag., 424, 16 (2017) |
| [9] | Methling, F., Nitzsch, R. von: Thematic portfolio optimization—challenging the core satellite approach (2018). 10.2139/ssrn.3227775 · Zbl 1443.91266 |
| [10] | Aouni, B.; Doumpos, M.; Pérez-Gladish, B.; Steuer, Re, On the increasing importance of multiple criteria decision aid methods for portfolio selection, J. Oper. Res. Soc. (2018) · doi:10.1080/01605682.2018.1475118 |
| [11] | Steuer, Re; Qi, Y.; Hirschberger, M., Multiple objectives in portfolio selection, J. Financ. Dec. Mak., 1, 1, 5-20 (2005) |
| [12] | Steuer, Ralph E.; Qi, Yue; Hirschberger, Markus, Portfolio Selection in the Presence of Multiple Criteria, Handbook of Financial Engineering, 3-24 (2008), Boston, MA: Springer US, Boston, MA |
| [13] | Steuer, Re; Qi, Y.; Hirschberger, M., Suitable-portfolio investors, nondominated frontier sensitivity, and the effect of multiple objectives on standard portfolio selection, Ann. Oper. Res. (2007) · Zbl 1132.91480 · doi:10.1007/s10479-006-0137-1 |
| [14] | Ballestero, E.; Bravo, M.; Pérez-Gladish, B.; Arenas-Parra, M.; Plà-Santamaria, D., Socially responsible investment. A multicriteria approach to portfolio selection combining ethical and financial objectives, Eur. J. Oper. Res., 25, 55 (2012) · doi:10.1016/j.ejor.2011.07.011 |
| [15] | Zopounidis, C.; Doumpos, M., Multiple Criteria Decision Making (2017), Cham: Springer, Cham |
| [16] | Hirschberger, M.; Steuer, Re; Utz, S.; Wimmer, M.; Qi, Y., Computing the nondominated surface in tri-criterion portfolio selection, Oper. Res. (2013) · Zbl 1267.90132 · doi:10.1287/opre.1120.1140 |
| [17] | Gasser, Sm; Rammerstorfer, M.; Weinmayer, K., Markowitz revisited Social portfolio engineering, Eur. J. Oper. Res. (2017) · Zbl 1395.91404 · doi:10.1016/j.ejor.2016.10.043 |
| [18] | Amenc, N.; Malaise, P.; Martellini, L., Revisiting core-satellite investing, Portf. Manag. (2004) · doi:10.3905/jpm.2004.443322 |
| [19] | Magoon, C., Better than sectors. The case for thematic investing, J. Indexes, 12, 5, 18-25 (2009) |
| [20] | Brough, M., Shepperson, A.: International Pension Plan Survey Report 2018. Willis Towers Watson (2019) |
| [21] | Zopounidis, C.; Galariotis, E.; Doumpos, M.; Sarri, S.; Andriosopoulos, K., Multiple criteria decision aiding for finance. An updated bibliographic survey, Eur. J. Oper. Res. (2015) · Zbl 1346.91274 · doi:10.1016/j.ejor.2015.05.032 |
| [22] | Markowitz, H., Portfolio Selection. Efficient Diversification of Investments (1996), Cambridge, MA: Blackwell, Cambridge, MA |
| [23] | Ehrgott, M.; Klamroth, K.; Schwehm, C., An MCDM approach to portfolio optimization, Eur. J. Oper. Res. (2004) · Zbl 1043.91016 · doi:10.1016/s0377-2217(02)00881-0 |
| [24] | Utz, S.; Wimmer, M.; Steuer, Re, Tri-criterion modeling for constructing more-sustainable mutual funds, Eur. J. Oper. Res. (2015) · Zbl 1346.91241 · doi:10.1016/j.ejor.2015.04.035 |
| [25] | Evans, Jl; Archer, Sh, Diversification and the reduction of dispersion. An empirical analysis, J. Finance (1968) · doi:10.1111/j.1540-6261.1968.tb00315.x |
| [26] | Statman, M., How many stocks make a diversified portfolio?, J. Financ. Quant. Anal. (1987) · doi:10.2307/2330969 |
| [27] | Tang, Gy, How efficient is naive portfolio diversification? An educational note, Omega (2004) · doi:10.1016/j.omega.2003.10.002 |
| [28] | MSCI: GICS Structure. Effective Sep1, 2016. https://www.msci.com/documents/10199/4547797/GICS+Structure+effective+Sep+1 |
| [29] | Sharpe, Wf, Mutual fund performance, J. Bus., 39, 1, 119-138 (1966) · doi:10.1086/294846 |
| [30] | Woerheide, W.; Persson, D., An index of portfolio diversification, Financ. Serv. Rev., 2, 2, 73-85 (1993) · doi:10.1016/1057-0810(92)90003-U |
This reference list is based on information provided by the publisher or from digital mathematics libraries. Its items are heuristically matched to zbMATH identifiers and may contain data conversion errors. In some cases that data have been complemented/enhanced by data from zbMATH Open. This attempts to reflect the references listed in the original paper as accurately as possible without claiming completeness or a perfect matching.
