Yves Choueifaty after years of academic research introduced a measure of diversification: the Diversification Ratio®. The details of this were initially published in 2006 in the United States Patent and Trademark Office (Choueifaty, “Methods and Systems for Providing an Anti-Benchmark Portfolio, May 2006) and later in 2008 in the Journal of Portfolio Management [Choueifaty & Al, “Toward Maximum Diversification” Fall 2008].
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TOBAM's investment philosophy is based on maximizing diversification
While many managers focus upon “alpha” to contribute to performance, less attention may be dedicated to improving “beta” which often provides the major contribution to performance and risk.
The most common way for investors to obtain ‘beta’ exposure is through a market cap-weighted strategy; however, academic and practitioner research shows that other strategies for gaining ‘beta’ exposure regularly outperform the market cap weighted strategies, leading to inefficiencies in the allocation.
Decades of academic studies since Harry Markowitz (1959) and William Sharpe (1964) have explained why diversification should play a key role in portfolios’s asset allocation. TOBAM believes that these inefficiencies arise from the lack of diversification in the market cap-weighted strategy.
TOBAM’s Anti-Benchmark® strategy is based on the Maximum Diversification® approach, designed to maximize the degree of diversification when selecting the weighting of assets in the portfolio allocation process. The Diversification Ratio® is maximized to produce a portfolio designed to access risk premium evenly from all the effective independent sources of risk available in the market at any given time. TOBAM’s approach is fully quantitative and does not use any predictions of expected return, neither for the assets nor for any underlying risk factors.
