by Ron Surz
Dr. Frank Sortino (AKA Dr. Downside) has just issued a warning to investors, his second warning in fifteen years. Many readers recognize the Sortino name because of the Sortino Ratio which, unlike the Sharpe ratio, focuses on downside risk rather than volatility (standard deviation). Dr. Sortino views risk as the potential for failing to achieve your objective, whereas volatility does not differentiate between wins and losses – a big success impacts volatility just as much as a big loss.
What most don’t realize is that Dr. Sortino is a portfolio manager and has written books about constructing portfolios that manage downside risk, which is critical for management to objectives. To this end he has devised several metrics like Upside Potential (U-P) Ratio and Omega Excess. The U-P Ratio measures the likelihood that a manager’s style can achieve a desired target return (DTR), and Omega Excess measures his risk-adjusted success at outperforming a custom benchmark. Back in 2000, these measures signaled danger ahead: it was going to be very hard to achieve your return objectives. Dr. Sortino wrote an article in Pensions & Investments warning readers that trouble lied ahead, and he was right.
Now the signals are again pointing to trouble, and Dr. Sortino is again warning investors about what lies ahead. Can he be right twice in a row? Of course there’s no shortage of reasons for concern, and Dr. Sortino touches on some of them. What makes this warning worth heeding is the source and the methodology, and the fact that Dr. Sortino is eating his own cooking by substantially reducing risk in the portfolios he manages.
For more details, see “Alert! Sortino Index is Now Black.” Like the flags in sailing, the Sortino Index is a Navigation Index that is color-coded. Black is bad.
To learn more about Ron Surz, visit PPCA, Inc.
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