PortfolioConstruction Forum

 Friday 24 July 2015

Independent continuing education for investment portfolio construction practitioners

G'day

With Grexit averted, this week's Fodder kicks off with two pieces on where next for the eurozone - neither is optimistic. In the first, Gavekal's Louis Gave argues the European reality is now a return of borders, national preferences and opt-outs - i.e. slower growth for the euro, and bad news for European bonds. And in the second, faculty member Oliver Hartwich explains why a repeat of the Greek crisis isn't the euro crisis we should really worry about.

On an entirely different note, Michael Kitces provides a really simple, improved version of the standard 4% safe withdrawal rate retirement spending strategy (often too conservative, with clients dying with more wealth than needed, but missing out while alive). Instead, Michael's "ratcheting" safe withdrawal rate strategy provides equal or better retirement spending as the 4% rule - and doesn't require a spending cut in the event of a market pullback in future.

Nobel laureate Robert Shiller then takes aim at The Incredible Shrinking Alpha, a book that's been gaining considerable attention amongst smart beta fans. It suggests that the hurdles to achieving alpha are getting higher and higher - i.e. alpha will eventually go to zero for every imaginable investment strategy. Not so, argues Shiller, because real world markets just don't support the notion.

Lastly, faculty member Dr Bob Gay weighs in with his insights on what to expect of long-term bond prices when the Fed starts raising rates at its September meeting, as Fed Reserve Chair Janet Yellen has this week said repeatedly is likely.

All the best for another great weekend's learning! - Graham

P.S. With Conference now full, we're offering a limited number of "standby" registrations. Plus, check out the keynote speaker lineup.

LATEST...

The end of an empire
We should acknowledge the Greek crisis for what it is - the death-knell for the European dream of empire. The growing reality is the return of borders, national preferences, and opt-outs. The euro has become a structurally weak currency and European bonds are likely to underperform those of other, nonshrinking, empires.
Louis-Vincent Gave, GaveKal | Opinion

Now for the next euro crisis
As we have just witnessed, it took an enormous effort to keep Greece in the eurozone. In the end, Europe could deal with the problem. For other members, such propping up will not always be possible. What happens next in France, Spain and Italy may well turn out to be more worrying than anything we have seen around Athens so far.
Oliver Hartwich, The New Zealand Initiative | Opinion

The ratcheting safe withdrawal rate
A simple ratchet-style "safe" withdrawal rate approach, where spending is increased by 10% any time the portfolio rises more than 50% above its starting value, beats the traditional 4% rule, giving equal or better retirement spending while not requiring spending cuts in the event of a market pullback in the future.
Michael Kitces, Pinnacle Advisory Group | 0.50 CE | White Paper

The mirage of the financial singularity
Will alpha eventually go to zero for every imaginable investment strategy, as suggested by Swedroe & Berkin's The Incredible Shrinking Alpha? The idea of financial singularity may seem inspiring, but real world markets are nowhere close to it.
Robert J. Shiller, Yale University | Opinion

Bonds and the Fed’s rate liftoff
This week, Chair of the Federal Reserve Janet Yellen has repeatedly said it is likely the Fed will lift its policy rate at its September meeting. It will be a minor adjustment but a momentous event. In short, I expect the first 100 basis points of Fed normalisation will have relatively little effect on long-term rates - with a critical caveat.
Dr Robert Gay, Fenwick Advisers | Opinion

RECENTLY...

Should investors look after PETS?
Understanding PETS - Political, Environmental, Technological/Scientific, Social - factors is relevant, if not crucial, to us as citizens. But to what extent are they relevant or important to investing?
Prof Jack Gray, UTS | Opinion

Bank hybrids - equity risk with bond returns?
We hear this one a lot. Overall, it's incredibly misleading. Bank hybrids offer better than bond returns with higher than bond risk, and lower than equity returns with much lower than equity risk.
Tim Farrelly, farrellys | Opinion

Greece, from bad to worse
Whatever the EU now decides at its summit on Sunday (the umpteenth, by my count), it will be costly. It is unlikely to work. And it was totally avoidable.
Oliver Hartwich, The New Zealand Initiative | Opinion

Burning bridges
Greece's creditors are likely to find it very difficult to compromise. Capitulate today and Greece will be back for more concessions in future. Many politicians will want to draw the line here and now, making Grexit highly likely.
Joshua McCallum & Gianluca Moretti, UBS Global Asset Management | Opinion

Markets from China, media commentary from Uranus
Despite all the negative ink that's been spilt over the recent collapse in Chinese equities, we continue to believe that a year from now there will be more marginal buyers of Chinese equities than today.
Louis-Vincent Gave, GaveKal | Opinion

The best approach to adjustable retirement withdrawals
The classic 4% rule holds withdrawals at 4% of the initial value of the portfolio at retirement. A great deal of recent research has focused on strategies that adjust withdrawals depending on investment experience.
Joe Tomlinson, Tomlinson Financial Planning | 0.75 CPD | Opinion

PLUS...

Register now: PortfolioConstruction Forum Conference (19-20 Aug)
Portfolio construction is approaching a crossroads – and critical questions must be answered. For starters, is the developed world’s 35-year (some say, 100-year) investment supercycle exhausted, heralding in an investment regime the likes of which most of us have never experienced in our careers? Or, is reinflation underway, signalling a return to higher rates and strong asset price growth and returns instead? Will active or passive strategies therefore be more appropriate? Complicating things further, what were only emerging megatrends early last decade have now become entrenched, causing massive structural change and further portfolio construction dilemmas. Critical decisions must now be made.

Since 2002, Conference has gained a reputation as THE investment conference of the year. This year's jam-packed, marathon two-day, 15-hour program features 30+ intensive, objective, interactive sessions and a carefully selected faculty of more than 35 international and local portfolio construction experts.

Conference 2015 will facilitate debate on the markets, strategies and investing with particular focus on portfolio “crossroads” - contemporary investment dilemmas and the resulting portfolio construction decisions. We'd welcome you joining us!
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