PortfolioConstruction Forum

 Friday 31 July 2015

G'day

This week's Fodder kicks off with three perspectives on China, before turning to the challenge of finding skill in active managers, plus a new "Undiscovered Fund".

Faculty member, Dr Woody Brock, traces China's growth through the five stages of transformation from an agricultural to a modern, mass-consumption society - the first four stages of which China has traversed in the least time of any major nation in history. The odds are low of it reaching stage 5, Woody argues, as it would require changes that conflict with the Party's aims - so while China will become a superpower, its future economic growth will be lower than Xi's "new normal" 6% pa. 

Gavekal's Louis-Vincent Gave takes a more optimistic view, arguing China's attempt to transform itself into an empire is the single most important macro-trend of our time. Given its geopolitical ambitions, China must internationalise the renminbi - with interesting implications for investors, he writes.

In the final of the three China perspectives, Yale University's Stephen Roach notes that Chinese regulators are taking a more proactive approach to market manipulation than the West, attempting "the policy equivalent of attempting to catch a falling knife" - arresting a market in free-fall.

Moving off China, Credit Suisse's Michael Mauboussin provides a very understandable analysis of "the paradox of skill" amongst active managers. The challenge is not a dearth of skill, but a surfeit, he shows -it's opportunity that's key. The merits of active management, smart beta, etc will be debated in a keynote session at PortfolioConstruction Forum Conference 2015 (if you're not coming to the live program, you can "attend" and earn CPD afterwards via the online Resources Kit).

Finally, on the topic of active funds management, we close with Zenith Investment Partners' latest "Undiscovered Fund" offering - an actively managed, unconstrained bond strategy.

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

LATEST...

China - the true risks to its future growth
China is a glass both half full and half empty. It will continue to grow and become a great superpower, but its future growth rate will be significantly lower than President Xi's "new normal" 6% forecast.
Dr Woody Brock, SED | White Paper

Not a People’s Republic - an empire
The single most important macro-trend of our time is China's attempt to transform itself from a typical (if large) emerging market into an empire. The interesting bit for investors is that growing empires usually breed strong currencies.
Louis-Vincent Gave, GaveKal | Opinion

Market manipulation goes global
Market manipulation has become standard operating procedure in policy circles around the world. The more proactive Chinese approach is the policy equivalent of attempting to catch a falling knife – arresting a market in free-fall.
Stephen Roach, Yale University | Opinion

Understanding skill - a paradox
The challenge in finding differential skill among active managers reflects a surfeit, not a dearth, of skill. This is the major lesson of the paradox of skill. As Napoleon was reported to say, "Ability is nothing without opportunity."
Michael Mauboussin, Credit Suisse | 0.75 CE | White Paper

Undiscovered Fund: Active unconstrained global debt strategy
A total return oriented, actively managed global fixed income strategy that aims to outperform the Bloomberg AusBond Bank Bill Index by 3% pa over the medium-term.
Zenith Investment Partners | 0.75 CE | Research

RECENTLY...

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 | 1 comment | 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

PLUS...

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