Asset Rotation The Demise of Modern Portfolio Theory and the Birth of an Investment Renaissance

In Asset Rotation, portfolio management pioneer Matthew P. Erickson demonstrates a time-tested approach to asset management that has worked throughout the history of capital markets, in good times and bad. Providing investors with strong participation in rising markets, but more importantly with a discipline to reduce participation in prolonged declines. Over time this revolutionary approach has yielded superior returns, with significantly reduced levels of risk; providing the engine for true, long-term sustainable growth.

The investment world as we know it has changed, and the paradigm has shifted. What has worked in the past may no longer work in the future. No longer may bonds be regarded as a safe haven asset class, as for the first time in generations, investors in fixed income face losses as interest rates rise from historical all-time lows. For those adhering to a conventional Modern Portfolio Theory based investment approach to asset management, what was once regarded as safe and stable, may very well soon become our greatest impediment.

Asset Rotation provides investors with a practical solution for today's real world problems. This tactical approach to asset management provides us with concrete proof that there is indeed a better way.

We are standing on the precipice of an Investment Renaissance. What was previously impossible, is now possible. Find out how.

• Presents an easy-to-understand price momentum-based approach to investing
• Illustrates the benefits of asset rotation
• Offers a systematic approach for securing a sound financial future
• Provides further insights as to how to customize your own asset rotation portfolio

Matthew Erickson gives investors a hands-on resource for how to navigate an increasingly difficult investment landscape, by providing them with keen insights into the most rapidly growing segment of the investment markets.

Acknowledgments xi

Prologue: David & Goliath xiii

Preface: We Stand on the Precipice of an

Investment Renaissance xv

Chapter 1: taking the 30,000-Foot View 1

Where We Are Today

The Individual Investor 1

Ockham’s razor 3

Our Current economic Landscape 6

The Bottom Line 11

Chapter 2: When the paradigm shifts 13

Why What Worked in the Past May No Longer

Work in the Future

A primer on Modern portfolio theory 15

The treasury run 19

Losing Money in Bonds 29

The Bottom Line 32

Chapter 3: shooting stars 35

The Performance Realities of Mutual

Fund Ownership

The persistence of Manager performance 38

The Bottom Line 53

Chapter 4: Beyond the Stars 55

Suggestions for Investment Selection Criteria

The Cost of Investing 58

Identifying Risk 64

Assessing the Investment Environment 73

The Bottom Line 76

Chapter 5: The Landscape Has Changed 79

The Proliferation of the ETF

The ETF: What Is It? 80

A Brief History 83

The Use of ETFs in a Portfolio 86

The Bottom Line 94

Chapter 6: Challenging Convention 97

An Introduction to Asset Rotation

A Time-Tested Approach 106

The 2000s 108

The 1990s 110

The 1980s 112

The 1970s 113

The 1960s 114

The 1950s 115

The 1940s 117

The Great Depression 118

From the Great Depression to Today 119

The Bottom Line 121

Chapter 7: Building a Better Mousetrap 123

Advanced Asset Rotation

Building a Better Mousetrap 124

The 1990s 134

The 2000s 136

From 2010 to 2012 138

23 Years: 1999–2012 140

Going Toe to Toe with the Best 141

The Bottom Line 143

Chapter 8: Choose Your Own Adventure 147

Building Your Own Asset Rotation Portfolio

Choose Your Own Adventure 148

Additional Factors to Consider: Eligible Risk Assets 149

Additional Factors to Consider: Eligible Flight to

Safety/Fixed-Income Assets 159

Additional Factors to Consider: Criteria for Investment

Selection 163

Creating a Scoring System 165

Required Due Diligence 167

The Bottom Line 168

Chapter 9: The Anatomy of Change 171

Setting Appropriate Expectations

Benchmarking Success 172

The Four Seasons 175

When Equity Markets Rise 176

When Equity Markets Fall 177

When Equity Markets Move Sideways 180

When Equity Markets Move Sideways with Volatility 183

The Bottom Line 186

Chapter 10: Letting Go of Your Crutch 189

Integrating Asset Rotation into Your

Overall Approach

Citius, Altius, Fortius 190

Asset Rotation as a Core Approach 191

Baby Steps 195

Supplementing Either Equities or Fixed Income 195

Adopting a Core/Satellite Approach 198

The Bottom Line 200

Chapter 11: The Road Ahead 203

Real-World Solutions for a Changing Landscape

The Bottom Line 205

About the Author 207

Index 209

MATTHEW P. ERICKSON is the CEO and Chief Investment Officer for Renaissance Capital Management, LLC, a boutique investment management firm located in Metropolitan Detroit, Michigan. Concurrently, Matt also serves as the CIO for Legacy Planning & Associates, Inc., an affiliated financial planning firm based out of Grand Rapids, MI. Among Matt’s primary functions is the day-to-day oversight and portfolio management of the firms’ proprietary investment portfolios.

Each of the Renaissance Portfolios are managed in accordance to Matt’s proprietary systematic and tactical methods of asset management, blending together three stylistically different approaches to investment management, including tactical managed ETF portfolios, opportunistic individual stock portfolios, and traditional Modern Portfolio Theory based allocations with a “beta-rotation” overlay. By combining these three unique approaches into one overarching portfolio, investors are provided with a higher degree of diversification. Prior to starting his own asset management firm, Matt was a partner in a successful wealth management advisory practice at UBS Financial Services, overseeing more than $350 million in private client assets. Matt and his wife Jill currently reside in Canton, Michigan with their daughter Mackenzie and son Jacob.