Click here to close now.




















Welcome!

News Feed Item

No Portfolio is an Island: Morningstar Research Examines How Job, Home Location, and Pension Affect Optimal Asset Allocation

CHICAGO, April 21, 2014 /PRNewswire/ -- Morningstar Investment Management, a unit of Morningstar, Inc. (NASDAQ: MORN), today published a new research paper, "No Portfolio is an Island," which examines how job, home location, and pension benefits, such as Social Security, affect an investor's optimal asset allocation. This paper is an extension of Morningstar Investment Management's research and patented methodology for incorporating non-financial assets like human capital—an individual's future potential savings—into the optimal asset allocation process. This paper brings a more nuanced perspective to individual investors' unique circumstances and lays out a framework for creating even more personalized portfolios. Two Morningstar Investment Management researchers, David Blanchett, head of retirement research, and Philip Straehl, senior research consultant and portfolio manager, co-authored the paper.

"Financial assets, such as stocks and bonds, are only one component of an investor's total economic worth. Other assets, such as human capital, real estate, and pensions, often represent a significant portion of an investor's total wealth, but are not frequently considered when building portfolios despite the fact that they share common risks with financial assets," Blanchett said.   

In the paper, the researchers demonstrate that industry-specific human capital, region-specific housing wealth, and pensions have statistically significant exposures to certain asset classes and risk factors, and investors should consider them when building portfolios. Through a series of optimizations, the Morningstar Investment Management researchers compare the asset allocation differences between portfolios that are only optimized for financial assets versus portfolios that consider total wealth. They determine that the optimal allocation varies materially when vocation, location, and pension benefits are considered, with average asset class differences exceeding 20 percent.

Other findings include:

  • Given the bond-like nature of human capital, portfolios that incorporate this asset generally tend to have lower allocations to intermediate- and long-term bonds and higher allocations to large-growth U.S. equities and commodities.
  • Investors who work in the manufacturing, utilities, and government sectors saw the largest changes to their optimal portfolios after the researchers factored industry-specific human capital into the asset allocation optimization. Their total-wealth optimized portfolios were significantly more aggressive than average, largely due to lower human capital volatility in these professions.
  • Housing wealth has less effect on the optimal asset allocation than industry-specific human capital, but still plays an important role. Of the 10 cities studied, home owners in Las Vegas had the largest changes to their optimal portfolios after the researchers factored regional-specific housing wealth into the portfolio. Their total-wealth optimized portfolios were generally more conservative than average given the historically volatile Las Vegas housing market, and had larger allocations to high-yield and non-U.S. bonds as well as small-cap value equities.
  • Because industry-specific human capital has such a significant effect on the optimal portfolio, younger investors who naturally have higher levels of human capital saw larger changes to their portfolios than older investors when total wealth was considered in the optimization.

"Each investor's situation is unique and his or her financial portfolio should reflect those distinct risk factors. The Morningstar research shows, for example, that if you're a banker in Texas, your human capital and real estate wealth are tied to the financial and energy sectors as well as to large-cap value stocks, so you would want to reduce exposure to those asset classes in your financial portfolio," Straehl said. "Our findings have important implications for individual and custom target-date model portfolio construction, and suggest that techniques that ignore human capital and outside assets are insufficient. A holistic definition of wealth is necessary to build truly efficient portfolios."

To read more research from Morningstar, click here.

About Morningstar Investment Management
The Morningstar Investment Management unit creates custom investment solutions that combine award-winning research and global resources with the proprietary data of Morningstar, Inc. Morningstar Investment Management includes 11 investment advisory entities around the world that provide comprehensive retirement, investment advisory, and portfolio management services for financial institutions, plan sponsors, and advisors. As of Dec. 31, 2013, Morningstar's investment advisory subsidiaries had approximately $159 billion in assets under advisement and management, including about $11 billion in solutions such as custom target-date model portfolios.

About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offers an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. Morningstar provides data on approximately 446,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 10 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its registered investment advisor subsidiaries. The company has operations in 27 countries.

©2014 Morningstar, Inc. All Rights Reserved.

MORN-R

Media Contact:
Alexa Auerbach, 312-696-6481 or [email protected]

SOURCE Morningstar, Inc.

More Stories By PR Newswire

Copyright © 2007 PR Newswire. All rights reserved. Republication or redistribution of PRNewswire content is expressly prohibited without the prior written consent of PRNewswire. PRNewswire shall not be liable for any errors or delays in the content, or for any actions taken in reliance thereon.

Latest Stories
SYS-CON Events announced today that G2G3 will exhibit at SYS-CON's @DevOpsSummit Silicon Valley, which will take place on November 3–5, 2015, at the Santa Clara Convention Center in Santa Clara, CA. Based on a collective appreciation for user experience, design, and technology, G2G3 is uniquely qualified and motivated to redefine how organizations and people engage in an increasingly digital world.
Any Ops team trying to support a company in today’s cloud-connected world knows that a new way of thinking is required – one just as dramatic than the shift from Ops to DevOps. The diversity of modern operations requires teams to focus their impact on breadth vs. depth. In his session at DevOps Summit, Adam Serediuk, Director of Operations at xMatters, Inc., will discuss the strategic requirements of evolving from Ops to DevOps, and why modern Operations has begun leveraging the “NoOps” approa...
Too often with compelling new technologies market participants become overly enamored with that attractiveness of the technology and neglect underlying business drivers. This tendency, what some call the “newest shiny object syndrome,” is understandable given that virtually all of us are heavily engaged in technology. But it is also mistaken. Without concrete business cases driving its deployment, IoT, like many other technologies before it, will fade into obscurity.
Organizations from small to large are increasingly adopting cloud solutions to deliver essential business services at a much lower cost. According to cyber security experts, the frequency and severity of cyber-attacks are on the rise, causing alarm to businesses and customers across a variety of industries. To defend against exploits like these, a company must adopt a comprehensive security defense strategy that is designed for their business. In 2015, organizations such as United Airlines, Sony...
The Internet of Things is in the early stages of mainstream deployment but it promises to unlock value and rapidly transform how organizations manage, operationalize, and monetize their assets. IoT is a complex structure of hardware, sensors, applications, analytics and devices that need to be able to communicate geographically and across all functions. Once the data is collected from numerous endpoints, the challenge then becomes converting it into actionable insight.
Puppet Labs has announced the next major update to its flagship product: Puppet Enterprise 2015.2. This release includes new features providing DevOps teams with clarity, simplicity and additional management capabilities, including an all-new user interface, an interactive graph for visualizing infrastructure code, a new unified agent and broader infrastructure support.
Consumer IoT applications provide data about the user that just doesn’t exist in traditional PC or mobile web applications. This rich data, or “context,” enables the highly personalized consumer experiences that characterize many consumer IoT apps. This same data is also providing brands with unprecedented insight into how their connected products are being used, while, at the same time, powering highly targeted engagement and marketing opportunities. In his session at @ThingsExpo, Nathan Trel...
Amazon and Google have built software-defined data centers (SDDCs) that deliver massively scalable services with great efficiency. Yet, building SDDCs has proven to be a near impossibility for ‘normal’ companies without hyper-scale resources. In his session at 17th Cloud Expo, David Cauthron, founder and chief executive officer of Nimboxx, will discuss the evolution of virtualization (hardware, application, memory, storage) and how commodity / open source hyper converged infrastructure (HCI) so...
In their Live Hack” presentation at 17th Cloud Expo, Stephen Coty and Paul Fletcher, Chief Security Evangelists at Alert Logic, will provide the audience with a chance to see a live demonstration of the common tools cyber attackers use to attack cloud and traditional IT systems. This “Live Hack” uses open source attack tools that are free and available for download by anybody. Attendees will learn where to find and how to operate these tools for the purpose of testing their own IT infrastructu...
The web app is agile. The REST API is agile. The testing and planning are agile. But alas, data infrastructures certainly are not. Once an application matures, changing the shape or indexing scheme of data often forces at best a top down planning exercise and at worst includes schema changes that force downtime. The time has come for a new approach that fundamentally advances the agility of distributed data infrastructures. Come learn about a new solution to the problems faced by software organ...
With the Apple Watch making its way onto wrists all over the world, it’s only a matter of time before it becomes a staple in the workplace. In fact, Forrester reported that 68 percent of technology and business decision-makers characterize wearables as a top priority for 2015. Recognizing their business value early on, FinancialForce.com was the first to bring ERP to wearables, helping streamline communication across front and back office functions. In his session at @ThingsExpo, Kevin Roberts...
IBM’s Blue Box Cloud, powered by OpenStack, is now available in any of IBM’s globally integrated cloud data centers running SoftLayer infrastructure. Less than 90 days after its acquisition of Blue Box, IBM has integrated its Blue Box Cloud Dedicated private-cloud-as-a-service into its broader portfolio of OpenStack® based solutions. The announcement, made today at the OpenStack Silicon Valley event, further highlights IBM’s continued support to deliver OpenStack solutions across all cloud depl...
Red Hat is investing in Tesora, the number one contributor to OpenStack Trove Database as a Service (DBaaS) also ranked among the top 20 companies contributing to OpenStack overall. Tesora, the company bringing OpenStack Trove Database as a Service (DBaaS) to the enterprise, has announced that Red Hat and others have invested in the company as a part of Tesora's latest funding round. The funding agreement expands on the ongoing collaboration between Tesora and Red Hat, which dates back to Febr...
With the proliferation of connected devices underpinning new Internet of Things systems, Brandon Schulz, Director of Luxoft IoT – Retail, will be looking at the transformation of the retail customer experience in brick and mortar stores in his session at @ThingsExpo. Questions he will address include: Will beacons drop to the wayside like QR codes, or be a proximity-based profit driver? How will the customer experience change in stores of all types when everything can be instrumented and a...
The Internet of Things (IoT) is about the digitization of physical assets including sensors, devices, machines, gateways, and the network. It creates possibilities for significant value creation and new revenue generating business models via data democratization and ubiquitous analytics across IoT networks. The explosion of data in all forms in IoT requires a more robust and broader lens in order to enable smarter timely actions and better outcomes. Business operations become the key driver of I...