POSITION: Professor of Finance, Chairman, San Francisco State University; CIO, Sortino Investment Advisors
LOCATION: Irvine, Calif.
EDUCATION: MBA, U.C. Berkeley; PhD Finance, University of Oregon
Since the early 1980s, when he founded the Pension Research Institute, Frank Sortino has been getting together with fellow PhDs to brainstorm better ways to manage and measure risk in the investment management industry. During that time, Sortino, a finance professor at San Francisco State University, and his friends in academia have churned out some pretty useful tools, including the Sortino Ratio, the Upside Potential Ratio and Omega Excess. These measures formed the basis of Post Modern Portfolio Theory (PMPT), which at its simplest distillation is downside risk management. At odds with the orthodoxy of Modern Portfolio Theory, PMPT has been relegated to a corner of the investment management world for years. However, Sortino's ideas and PMPT may be catching on: Downside risk management has a little bit more appeal after the 56 percent drawdown in U.S. equities between October 2007 and March 2009.
Sortino recently began working with Morgan Stanley Smith Barney, whose advisors now include his methodologies in their asset allocation evaluations. And this fall, one of the largest national brokerage firms expects to make available a suite of funds based on Sortino ideas to 401(k) plan sponsor clients. (The firm requested anonymity as a contract has not been signed nor have the funds been approved for retirement plans yet.)
A long-time critic of traditional target date funds — which calculate asset allocations solely based on an individual's age and risk tolerance, without regard to assets, income, contributions or goals — Sortino says his funds will give investors a clearer path to retirement with less risk of massive drawdowns. In light of what has occurred in the financial markets — as well as the disastrous failures to protect assets in many “conservative” target date funds — Sortino's funds will be worth watching. If they do what they're supposed to do, the retirement products market may soon get a PMPT makeover.