I am often asked what value should I target in the IPC’s. Is a value of 60% really better than a value of 50%? Here is my latest thinking; Reducing the amount of systemic exposure is indeed critical to reducing the risk experience of a portfolio. there seems to be an exponential utility decay function present. For example A value of 20% could be more than twice as good as a value of 10%. However, a value of 30% may on be 80% better than a value of 20%. 70% may not be any better than 60%.
Once a portfolio has an IPC value in the mid 40’s, I believe there are better diversification evaluations than working hard to squeeze out a little more IPC score.
For IPC scores less than the mid 40’s, definately expiriment until the score is higher. Once the score is in the 45-65% range, then shift your focus to the KLD value.
If you use Gsphere Institutional, pay attention to the first and second dimension. Containing less portfolio energy inside the first and second dimension means more to achieving superior diversifcation than taking an IPC value from 50% to 53%.
High IPC scores can be built from portfolios with with too few holdings to be well diversified. Decreasing the portfolio value captured in the first and second dimension is inescapably adding to the diversification. In essence, this analysis serves to diversify the portfolio’s diversification. Now that’s True Diversification®.