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The Five Tool Allocator

The Holy Grail in baseball is what's known as the Five Tool Player - that rare athlete who excels in the following five categories:

  • Speed
  • Arm strength
  • Fielding
  • Hitting for average
  • Hitting for power

Some of the most lauded Major League ballplayers to be labeled as such include A-Rod, Ken Griffey, Jr., Ichiro, Hank Aaron, and Mickey Mantle. The best of the best, the cream of the crop.

This rarified air exists simply because these various skills often come at the expense of one or more of the others. The guy hitting the most dingers might not be the best at stealing bases. The guy who gets on base most consistently might not also be able to fire a laser beam from centerfield to home plate with pinpoint accuracy. You get the idea. 

Five tool investments are equally, if not more, rare.

Equity investors increasingly look towards factors as the explanatory variables of risk and return in the stock market. Five of the most well documented factors that have acted as determinants of long-term equity performance are: value, size, momentum, quality, and low volatility. Heck, we might even say these are the five tools to best judge the attractiveness of a particular stock. 

The challenge? The intersection of the Venn diagram of these five factors would be microscopic. 

Don't get me wrong. There is a strong case for allocating to each of these factors individually, and an even stronger case for blending them together for the diversification benefits.

But if you were trying to find a stock that was an A+ across all five factors, you'd find it to be a futile effort. 

I can save you the time with a little anecdote. I looked under the hood of five single factor ETFs from iShares (I used the same fund family and index provider for consistency) and examined the top 25 holdings of each. The five ETFs were:

  • VLUE: iShares MSCI USA Value Factor ETF 
  • MTUM: iShares MSCI USA Momentum Factor ETF
  • QUAL: iShares MSCI USA Quality Factor ETF
  • SIZE: iShares MSCI USA Size Factor ETF
  • USMV: iShares MSCI USA Min Vol Factor ETF

Want to guess how many stocks were in the Top 25 holdings of all five ETFs?

Zero. Zip. Zilch. Nada. 

In fact, only two stocks (Alphabet and Target) appeared in the top holdings of at least 3 of the 5 ETFs. 

This brings me to portfolios as a whole and the allocators who build them. 

As we look to introduce new assets into our clients' portfolios, we are essentially "hiring" them to do one or more jobs that our current holdings are incapable of (or inadequate at) doing. In a perfect world - which we do not have the luxury of living in - we'd stumble across a mystical diversifier that checks off all our boxes and picks up the heavy lifting where our existing portfolio assets fall short. But alas, no such unicorn-like investment exists that:

  • Provides meaningful capital appreciation
  • Generates substantial current income
  • Is impervious to inflation dynamics
  • Acts in a completely uncorrelated manner relative to all other asset classes, in both good times and bad
  • Exhibits little to no volatility and has minimal downside risk

Absent bulletproof investments and unobtainable perfect portfolios, allocators must look inward and recognize that investments are merely raw materials that we can combine in such a way that gives us the greatest odds for success, while also recognizing that these combinations of assets may be difficult to hang onto at times and might look quite different than the blends of our peers.

When I set out to write The Allocator's Edge, the edge I was referring to was not a specific portfolio per se, but rather a set of characteristics that, if applied cohesively, can improve the odds of achieving unconventional success. If we were to build an allocator from scratch, what traits would we want them to exhibit?

Translated into an equation, it would be something like this:

The Allocator’s Edge = Sensible + Humble + Autonomous + Resolute + Persevering

Hey, what a coincidence—it spells SHARP! Ok, maybe not a coincidence, but I like a good mnemonic device as much as the next guy.

In today’s uncertain world, with such lackluster prospects for traditional portfolios, it’s hard to imagine five better qualities you would want an allocator to possess to best navigate the challenging road ahead.

  • Sensible: Armed with logic and data, the sensible allocator approaches her decisions with common sense, practicality, and an evidence-based mindset.
  • Humble: Lacking clairvoyance, the humble allocator has an appreciation for history, while respecting its limitations. She understands that while we can’t predict the future, we can prepare for many possible futures.
  • Autonomous: Curious, confident, and courageous, the autonomous allocator applies independent thinking with a blatant disregard for traditional portfolio orthodoxy.
  • Resolute: Purpose-driven to do the right thing by their client, the resolute allocator works tirelessly to meet his goals and objectives with unrivaled tenacity.
  • Persevering: Patient and process-oriented, the persevering allocator endures through the inevitable rough patches and focuses steadfastly on the long term.

None of us would score a perfect ten on all the above. But that shouldn’t keep us from continually striving for excellence in all five areas. Much like incremental returns can compound significantly over decades, so too can incremental habits and behavior changes.

The best five tool baseball players are typically a lock for the Hall of Fame. 

The best five tool allocators are equally as likely to deliver positive outcomes for the people and entities they serve.

About the author

Phil Huber, CFA, CFP®

Phil is the Head of Portfolio Solutions for Cliffwater, a leading alternative investment adviser and fund manager. Prior to joining Cliffwater in 2024, Phil was the Chief Investment Officer for Savant Wealth Management, a multi-billion dollar wealth management firm. Phil has been involved in the financial services industry since 2007. He earned a bachelor’s degree in finance from the Kelley School of Business at Indiana University. He is a member of the CFA Society of Chicago. More about me here. Twitter: @bpsandpieces

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