Father (And Son) Knows Best

Modern portfolio theory is the foundation of global money management, but a pair of mathematicians in Boston has revamped it—with market-beating success.

- Daniel Fisher

Among academicians, few have made a real-world impact as far-reaching as Harry Markowitz, the father of modern portfolio theory. Markowitz devised his seminal theory as a 23-year-old PhD student at the University of Chicago in 1950 and won a Nobel Prize for it in 1990. For generations, it has guided money managers in picking stocks that have the highest possible returns given a set of risk assumptions. In fact, Markowitz’s mean-variance optimisation, also known as the “efficient frontier”, is embedded in most software that financial advisors use to create portfolios today.

But there’s a big problem lurking at its core: The mathematical tools Markowitz used are actually too precise, so in the real world of stocks and bonds—where information is much blurrier—it occasionally produces wild outcomes.

Enter New Frontier Advisors, a PhD-heavy Boston-based asset manager that has been using low-cost exchange-traded funds to one-up Markowitz. For more than a decade, its clients have beaten equity- and bond-market benchmarks by 100 to 200 basis points after fees, and assets have swelled to almost $3 billion.