David Hershey's criticisms (Other Views, March 22) of Frank Sortino's Feb. 9 commentary contains several major inaccuracies of their own. The most glaring of these is his total misunderstanding of the minimal acceptable return, or MAR, a key component of Mr. Sortino's work on downside risk, and the cornerstone of Mr. Hershey's criticisms of Frank's work.
Mr. Hershey's primary thesis is that investors need to focus on a liability benchmark, rather than a traditional index. No argument there. Mr. Sortino and I have for years been arguing just that. He then goes on to criticize the MAR as "an absolute-return benchmark" that is "arbitrarily chosen" and therefore without any relevance to the investor's liability requirements.
In fact, Mr. Hershey has it exactly backwards. The MAR is designed specifically to reflect the investor's liability requirements. Let's begin with the definition of the MAR: "The return that an investor must earn in order to reach his objectives." How is this a "traditional" index? How is this any more arbitrary or absolute than the duration of the investor's liabilities?
So, while Mr. Hershey makes many valid points, it would have been more appropriate if he had directed his complaints at the proponents of traditional portfolio theory who are stuck in the absolute, index-driven world he complains about, rather than by singling out Mr. Sortino, who has worked so hard in trying to bring the quantitative investing industry into the 21st century.
Brian M. Rom
Correction: PFM Advisors was one of the signers of the April 19 letter to the editor, "Consultants ask managers to take a stand." Its name was listed incorrectly.