Richard O. Michaud apparently has built a better mousetrap, according to the Big Cheese himself.
In a test of a traditional mean-variance optimizer and Mr. Michaud's resampling technique, Harry Markowitz, who is known as the father of modern portfolio theory, found that Mr. Michaud's methodology won out.
"Score one for Dick," Mr. Markowitz, a Nobel laureate, said in an interview.
For institutional investors, it's no small matter. In the current era of lower expected returns, they are scraping for added value wherever they can find it. If there's a way for institutions to enhance returns without taking any extra risk, they've got to take a look at it, said Mr. Michaud, who is president of New Frontier Advisors LLC, Boston.
Mr. Michaud and his son, Robert, patented the portfolio-optimization technology in late 1999. What the methodology does is calculate the average of hundreds of efficient frontiers, running the data through a Monte Carlo simulation. The upshot: Mr. Michaud's portfolios tend to be more diversified and more stable over time than asset allocations produced by traditional optimizers.
Mr. Markowitz said he and co-author Nilufer Usmen, an associate professor of finance at Montclair State University's School of Business, Montclair, N.J., kept checking their results.
But, in the end, they found that Mr. Michaud's methodology beat the traditional optimizer in 10 out of 10 "truths," and in a way that was statistically significant. Overall, the Michaud optimizer produced the equivalent of 57 basis points in added return, according to their paper, which has been published online by the Journal of Investment Management. (The hard copy will be published in early January.)
"We were a little surprised by the results," said Mr. Markowitz, known as a master of understatement.
However, the Nobel laureate said the jury is still out. He said a different set of assumptions might produce a different result.