Father (and Son) Knows Best

Modern portfolio theory is the foundation of global money management, but a pair of mathematicians in Boston have revamped it—with market beating success.

 

- Daniel Fisher

Among academicians, few have made a real-world impact as far-reaching as Harry Markowitz, the father of modern portfolio theory. Markowitz devised his seminal theory as a 23-year-old Ph.D. student at the University of Chicago in 1950 and won a Nobel Prize for it in 1990. For generations, it has guided money managers in picking stocks that have the highest possible returns given a set of risk assumptions. In fact, Markowitz’s mean-variance optimization, also known as the “efficient frontier,” is embedded in most software that financial advisors use to create portfolios today.

But there’s a big problem lurking at its core: The mathematical tools Markowitz used are actually too precise, so in the real world of stocks and bonds— where information is much blurrier—it occasionally produces wild outcomes.

Enter New Frontier Advisors, a Ph.D.-heavy Boston-based asset manager that has been using low-cost exchange-traded funds to one-up Markowitz. For more than a decade, its clients have beaten equity- and bond-market benchmarks by 100 to 200 basis points after fees, and assets have swelled to almost $3 billion.