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PortfolioConstruction Forum


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 Friday 05 June 2015

The independent professional development service for investment portfolio construction practitioners


This week, Fodder kicks off with Nouriel Roubini discussing the cause of the recent bond market shocks and the ticking time bomb of bond market illiquidity, with high frequency traders the detonator. Yes, Nouriel is a perma bear - but he's not alone on this. It's an issue that Scott Weiner raised at our Markets Summit program back in February - "attend" Scott's presentation and read his excellent paper on the topic. Liquid, stable bond markets may have gone the way of the dinosaurs.

All of which has driven the rise in popularity of smart beta solutions over recent years - and the rest of Fodder features contrasting views about smart beta, none of it quant geek speak, so don't be put off!

Firstly, we feature Michael Furey's presentation from our recent Symposium in which he argued we should be constructing portfolios using a risk bucket approach, one of the buckets being smart beta.

Next, controversial mathematician and financial adviser, Michael Edesess, outlines what he sees as the flaws in the smart beta concept. Far from smart, he's believes it's all the result of dumb data mining.

Neuberger Berman offers a paper on a relatively new breed of smart beta funds - liquid alternatives funds (in their view, a better form of hedge fund) that aim to overcome the downsides (cost, transparency, liquidity) of traditional hedge funds.

CFM's Philippe Jordan then ties it all neatly in a bow, harking back to Nouriel's point that we can no longer rely on large, deep fixed income markets, and Michael's three risk buckets. We may have lost fixed income as a pillar of diversification but alternative (i.e. 'smart') beta is the solution, he argues.

Remember, this is a "Forum". So once you've read the arguments on smart beta, have your say. Either vote on whether you agree/disagree and/or be brave and post a comment!

All the best for some great (long) weekend's learning! - Graham

P.S. Mark your diary!  PortfolioConstruction Conference - 19/20 August 2015. Registration opens next week.


The liquidity time bomb
Macro liquidity is feeding asset booms and bubbles in equity, bond, and other asset markets. As more investors pile into overvalued, increasingly illiquid assets – such as bonds – the risk of a long-term crash increases.
Nouriel Roubini, Roubini Global Economics

Portfolio construction of the future will focus on 3 risk buckets
Portfolio construction should focus on three risk buckets – beta, smart beta, and alpha. If not, you run the risk of creating a poorly diversified (that is, over diversified) portfolio – and, worse, a portfolio that costs far more than it should.
Michael Furey, Delta Research & Advisory

Why 'smart beta' is really dumb
Does smart beta deserve the attention it is getting? I can't see how it's possible to have more diversification benefit using a factor approach to constructing portfolios than any other approach.
Michael Edesess, Fair Advisors
| 0.75 CE Opinion

Alternative beta - the third leg of the stool
In an age where we have lost one of the pillars of traditional diversification - fixed income - what do you do? You need to stretch portfolios into other areas, including alternative beta.
Philippe Jordan, Capital Fund Management

Liquid alternatives - a tool for objectives-based portfolios
Diversified liquid alternative funds offer investors cost-effective, transparent and liquid access to a best-of-breed hedge fund managers, with low beta to traditional asset classes.
Neuberger Berman
| 0.50 CE  | White Paper

Member comments
Lower for longer
I agree... I would add that, in addition to a slower growth in workers, we have higher growth in retirees. These people are reliant on generating cash flows from their capital...
Aaron Minney, Challenger Comment


Secular reflation
I think we've seen the low in European bond yields and that we have commenced on the path - at long last - of secular reflation.
Jonathan Pain, The Pain Report

Big raises and lifestyle creep
The surprising result of a recent study is that the "conventional" view that earnings rise steadily (above inflation) throughout our careers is not accurate. Good spending habits established early on can make an astounding difference to wealth over a lifetime.
Michael Kitces, Pinnacle Advisory Group
| 0.50 CE |

Small is beautiful
We now have enough history to determine who the winners were from 25 years of globalisation. The answer? Small countries. The investment conclusion is obvious - overweight good companies listed in small countries.
Charles Gave, GaveKal

Fantasyland for Europe's bonds
This week, Portugal's sovereign bonds traded on negative yield - flying in the face of any sensible assessment of credit risk. There seems to be little chance that the ECB's belated and oversized QE program will end gracefully. Policy blunders never do.
Dr Robert Gay, Fenwick Advisers

Cash may not be king - but it could be a handsome prince
In this environment, what’s very important is capital preservation. The problem investors have is that there are very few places to hide. So, while cash may not be king, I think it could end up being a very handsome prince.
Simon Doyle, Schroders
| Opinion

Member comments
Academy Autumn Seminar - Key takeout

7 Chinese guys are making decisions which will impact on our domestic economy. Do they have more power over our future living standards than our own elected government?
Kay Aarons, Strategic Financial Solutions Comment

Academy Autumn Seminar -  Key takeout
Rapid economic growth can present some serious issues in the short term, but improved efficiencies can result in net benefits over the longer term.
Jonathon Costello , Australian Unity Personal Financial Services


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