R.I.P. Harry Markowitz, PhD
I'm sorry to report that a true giant of the investing world sadly passed away at his home in San Diego, California, on the 22nd June 2023 at the age of 95.
Harry Max Markowitz was a Professor of Finance at the University of California, San Diego (UCSD). Amongst many lifetime achievements, in 1990 he was awarded the Nobel Memorial Prize for his work in Economic Sciences.
He was the founder of Modern Portfolio Theory, and for that both we and our clients will be eternally grateful.
You can read the detail of Markowitz's work on his Wikipedia entry (warning: there's quite a lot of maths!). In brief, though, his pioneering work came as the result of his in-depth study of the effects of asset risk, return, correlation and diversification on investment portfolio returns.
Until Harry's PhD thesis was published in 1954 there had been little work done on the effect of risk on diversified investment portfolios. What he did was to demonstrate mathematically that it is possible to obtain equivalent returns from a diversified portfolio to those from single securities, whilst lowering the overall portfolio risk (the variance of returns) experienced by the investor. His calculation of an 'efficient frontier' that optimises the return on a portfolio relative to the risk it contains has been used as the basis for portfolio management extensively since then, and has helped thousands of investors to 'have their cake and eat it' by diversifying away the individual risks of owning stocks and shares whilst enjoying acceptable returns. It's a principle that has underpinned our own portfolio construction on behalf of clients for the last 20+ years, and it has been a factor in the successful results that we have been able to generate on their behalf over that time.
Harry's work on modern portfolio theory has been challenged over the years, and it contains some obvious flaws. For example, for the model to work correctly in practice, assumptions have to made by the investor regarding the expected future returns and degree of risk represented by each individual asset, and in reality these can vary over different time periods making the output less reliable. Nevertheless, the basic premise that a well-constructed investment portfolio, within which the degree of correlation between assets as well as the expected returns and risk levels are part of the construction process, remains highly relevant in our opinion. It's why, if you read the minutes of our Investment Committee meetings, we talk about these correlations and seek to maintain them. A good example is the presence of gold shares in our clients' portfolios, an asset that often moves conversely to other equities and helped to maintain portfolio returns through the course of the 2008 banking crisis despite its previous poor performance in absolute terms.
Harry Markowitz's work changed the world and he will be remembered in history for his ground-breaking contribution. Our condolences go to his family and the whole investing community who have lost a brilliant mind and a leader in his field.