'Human Capital' Asset Allocation Concept Gets Patent

Ibbotson Associates has received a patent on its portfolio creation technique for individual investors based on the concept of human capital - an investor’s future potential savings.

An Ibbotson news release said the portfolio construction method balances an investor’s financial capital and human capital. The company said it defines financial capital as an investor’s current savings while human capital is an investor’s future potential savings. That future savings, the news release said, “is often the single largest asset an investor has.”

According to the announcement, younger investors have far more human capital than older investors because they have a longer time in which to earn and save.

The company said younger investors should hold their financial capital in more aggressive investments to balance out that large allocation to human capital. Older investors, on the other hand, have less human capital and should guard their financial capital with a larger concentration in conservative investments, Ibbotson said.

The company said the human capital concept was developed by Peng Chen, president and chief investment officer of Ibbotson Associates; Roger Ibbotson, founder of Ibbotson Associates and professor of finance at Yale School of Management; and Mike Henkel, former president of Ibbotson Associates.

“Andre Agassi and I are the same age and we may even have the same risk tolerance, but that doesn’t necessarily mean we should have the same asset allocation,” Chen said. “An investor’s tolerance for risk and age should not be the only factors that determine asset allocation in a portfolio. One’s current financial situation and future earning ability—financial capital and human capital, respectively—play a large role.”

Ibbotson said the newest patent is its second for its asset allocation techniques.