Rekenthaler Questions "Efficient Frontier," Raises Specter of Multimarkets
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Wednesday, June 26, 2013

Rekenthaler Questions "Efficient Frontier," Raises Specter of Multimarkets

Morningstar's John Rekenthaler raised the specter of multimarket funds, which offered high yield and low volatility by going long in higher-yielding currencies and short in lower-yielding currencies. Of course the fund category met an untimely end in 1992 when the European Exchange Rate Mechanism broke down.

Rekenthaler argues that what is known as the "efficient frontier" in modern portfolio theory, or what multimarkets were trying to achieve in the 1980s, is a flawed concept because the results depend too much on return assumptions for the asset classes. He points to a recent paper that argues the investment process should take investor preference into account for a better, but not foolproof strategy, as the underlying assets estimates can still be wrong.

In reaction to Monday's column, readers did not take kindly to Rekenthaler's opinion on fund commissions. To keep his pitchfork-wielding readers, he clarified that front-end commissions are much cheaper and preferable for the average investor.

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