Disciples of factor-based investing need to respond to a new challenge - while factor analysis is valuable for two reasons, investors are better served by a strategy based solely on allocating to asset classes, a new study claims.

There's a widely held belief that in order to create alpha, a fund manager needs to make meaningful bets away from the market. But is this the reality? Does greater non-market risk actually produce higher alpha?

Michael Furey | 0.50 CE

The case for and against illiquid assets is hotly debated. Indeed, other than fees, the battle between industry funds and retail super funds has been heavily fought around significantly differing levels of exposures to the main illiquid asset classes.

I have 80% of my personal assets in private equity - and I plan to increase that to roughly 100%. I don’t have many other good ideas as to what to do in this environment.

Research Roundtable helps identify quality investment solutions and their place in portfolios. Covering a diverse range of investment strategies across a continuous series of meetings, it aims to further develop Investment Committee members’ knowledge and skill in the “secondary” fund research area of “know your product”, and the related due diligence of fund research houses, fund managers and funds, as well as Investment Committee APL and multi-manager portfolio decision-making.

To harness the full potential of India's growth story, investors should seek exposure to India's mid and small cap companies, rather than just the large, liquid companies with significant global revenue bases which dominate benchmark allocations.

Between 15 and 30 years ago, there were several studies into the importance of asset allocation. Is asset allocation still important today, and in the Australian fund context? How successful is active management?

Michael Furey | 1.00 CE

The efficient frontier for retirement income generally consists of combinations of stocks and income annuities - perhaps surprisingly, bond funds do not serve a useful role in the optimal retirement income portfolio.

With interest rates at record lows, it is a really good time to revisit how we build debt portfolios. A three box approach can really help in making and communicating investment decisions for the secure part of their portfolio in the new, low interest rate environment.

Tim Farrelly | 2 comments | 0.50 CE

An Oxford Uni paper in 2013¹ severely criticised consultants for failing to pick winners via their fund manager research. The New York Times picked it up. But the fact that consultants couldn't identify gold medal winners in advance doesn't matter.

The typical approach to portfolio construction in the world of financial planning is a two-step process encompassing asset allocation and investment selection. It is the second step where a major flaw exists.

Real return investing isn't too real at all, with big targets like CPI+5%. It is an objective that is not strongly linked to the reality of investment markets - so prepare for another investment approach aligned with disappointment.

PortfolioConstruction Forum Strategies Conference 2015 featured a carefully selected faculty of more than 35 international and local portfolio construction experts offering their best high conviction ideas about critical portfolio "crossroads". Here are the highlights.

Many have taken an alarmist approach to the recent sell-off in China's A sharemarket, declaring the bubble has definitely burst. The question was well put by one of our key clients who in late June asked, "Is China Done?".

Our eclectic Panel - a politician, a pastor, a professor, a portfolio manager, a practitioner, a provocateur, and a 'preneur, moderated by our Publisher - addresses Conference 2015 delegates' questions about key Crossroads, Dilemmas and Decisions.

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A recent survey of 1000 Australian investors found that individuals who are advised have greater confidence in their retirement readiness and a heightened awareness of the retirement strategies and solutions available.

Going forward, there are headwinds for equity and fixed income markets, however the outlook for alpha generation from many alternative strategies remains robust. Now is an attractive point in the cycle to add, or increase exposure to alternative strategies.

While 36% of investors say they are ‘reviewing their need for downside protection’, only 8% are currently implementing it. Yet there are many strategies to manage risk in portfolios.

High active share is often profiled as “better” but it creates a dilemma – portfolios can exhibit risk concentrations which may lead to volatile return streams for investors. Low active share funds should not be excluded from asset allocators’ tool kit.

The smooth sailing of Australian equities over the last few years has developed complacency among investors. But rougher seas ahead will require a more active approach. It’s time to ensure that you engage a truly active manager.

A better way to evaluate companies and portfolios is to consider where companies do business, not where they are headquartered. It is time to invest beyond borders.

By avoiding unrewarded risk and by avoiding going against other factors, the risk return profile of factor investing portfolios can be improved further.

At the heart of defensive investing lies infrastructure assets - but only only in its purest form is infrastructure able to deliver the defensive qualities that investors are targeting.

Investors face five dilemmas on which judgments need to be made with respect to: earnings, valuations, momentum, reinvestment and sentiment.

As volatility in bond markets becomes more pronounced, and asset bubbles develop, investors will need to reassess their approach to the asset class. Unconstrained bond investors can exploit opportunities across relative value, yield curve and fixed income volatility.

Our panel debated the views of the two presenters who addressed this "crossroad" - that boutique investment managers outperform and that smart beta is dumb.

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Smart beta's popularity has swept not only the ETF world but academia too. Yet there is academic debate about whether smart beta produces alpha, risk-adjusted performance or only beta, a premium for bearing risk.

Michael Edesess | 0.50 CE

While the debate over the value of active management has intensified in recent years, the outperformance of boutique managers has been overlooked. Active boutique managers have consistently outperformed both non-boutique peers and indices over the past twenty years.

Indexing could be as problematic during the next few decades as it has been successful in the past few. This heightens the appeal of active management for those brave enough to pursue it.

Woody Brock | 0.50 CE

There are two possible outcomes from the extreme debt levels in the global economy - high inflation or long-term below trend growth. The key dilemma is how to minimise this uncertainty and return dispersion.

Warryn Robertson | 0.75 CE

Investors need to be more focused on downside risk management. An environment of lower expected returns and higher volatility means risk management is just as important as return management.

The diverse range of quality small cap companies with recurring earnings and growing dividend yields offer investors essential risk diversification and should be incorporated into portfolios.

The view that investors should leave their values at the door is fundamentally mistaken as both an ethical theory and an investment strategy.

Portfolio construction is approaching a crossroads – critical questions must be answered, and critical decisions must now be made.

A QMTV (quality, momentum, transition and value) framework can help investors manage buy, hold and sell decisions through various cycles and provide a crossroad signal.

Six years into a bull market, Australian equity values are beginning to look stretched. But large divergences in valuations across sectors are creating great opportunities for truly active managers.

Infrastructure has gained greater focus in recent years, with investors drawn to its defensive characteristics. But infrastructure investing requires a tight definition to deliver the defensive attributes that investors are targeting.

While the debate over the value of active investment management has intensified in recent years, the outperformance of boutique managers over non-boutiques and indices has been overlooked.

The rise of liquid alternatives not only marks an improvement on traditional fund of hedge funds, it also makes a hedge fund allocation a genuine competitor with other onshore absolute return solutions.

This report explores institutional investors' attitudes toward equity market risk and looks at the downside protection strategies they are using to insure their portfolios against volatility.

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."

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.

We hear this one a lot. It's incredibly misleading. Bank hybrids offer better than bond returns with higher risk, and lower than equity returns with much lower than equity risk.

As always, PortfolioConstruction Forum Symposium is the highlight of my year in terms of professional development. This year's was probably the best to date. Here are the key takeouts I sent to my clients.

PortfolioConstruction Forum Academy challenges and advances portfolio construction knowledge and wisdom. Open to a select group of just 80 senior, experienced portfolio construction practitioners each year, Academy will enable you to continuously develop, test, and validate your portfolio construction philosophy and decision-making framework.

The 2014-2015 Academy Resources Kit is a rich repository of continuing education material including the presentations, podcasts, and research papers from the Academy Seminars for the 2014-2015 curriculum year...

The 2013-2014 Academy Resources Kit is a rich repository of continuing education material including the presentations, podcasts, and research papers from the Academy Seminars for the 2013-2014 curriculum year...

The 2012-2013 Academy Resources Kit is a rich repository of continuing education material including the presentations, podcasts, and research papers from the Academy Seminars for the 2012-2013 curriculum year.

The 2011-2012 Academy Resources Kit is a rich repository of continuing education material including the presentations, podcasts, and research papers from the Academy Seminars for the 2011-2012 curriculum year.

The 2010-2011 Academy Resources Kit is a rich repository of continuing education material including the presentations, podcasts, and research papers from the Academy Seminars for the 2010-2011 curriculum year.

PortfolioConstruction Forum Academy Winter Seminar 2015 featured four sessions. This Resources Kit contains the materials for preparing for the Seminar, as well as the presentation slides.

Michael Edesess has encouraged investors to be skeptical of the strategies being marketed under the moniker of "smart beta". I'm compelled to cross-examine his accusations.

Symposium 2015 featured 20+ leading investment professionals arguing their best, high conviction ideas about the markets, strategies and investing.

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 | 0.75 CE

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.

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 | 0.50 CE

Divergences in global economic and policy outcomes have important implications for markets around the world. This policy divergence has directly influenced asset prices across the globe with implications for stocks, bonds and currency markets.

China now has to deal with a massive excess supply of property… This is unlikely to be “just another property cycle” in China. The bursting of China’s property bubble poses a major risk to both the country’s stability and the global economy.

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 | 0.75 CE

Each of our Symposium 2015 DDF presenters gave a 2-minute overview of their high conviction portfolio construction strategy idea.

Rather than large, liquid companies with significant global revenue bases which dominate benchmark allocations, investors should seek exposure to India’s surging local demand…

When combining managers together to form a multi-manager global equity portfolio, investors should still aim to keep active share relatively high.

uilding NZ fixed interest portfolios is harder than it has ever been… Portfolios need to be constructed for the specific needs of clients, which will typically be a combination of liquidity, income, quality, and diversification

At the coal face, engagement between company boards and institutional shareholders can achieve meaningful improvements for all investors. Perseverance and commitment are essential.

The diverse range of quality small cap companies with recurring earnings and growing dividend yields offer investors essential risk diversification and should be incorporated into portfolios.

Investors will need to hunt out alternative sources of yield to meet their investment objectives. All is not lost. Yield can be preserved in a low yield world but investors need to be aware of the risks and trade-offs.

Each panelist outlined which high conviction markets idea from Symposium 2015 day one they agreed with most, and which one they agreed with least.

Our Symposium 2015 debated their high conviction ideas on the drivers of, and medium-term outlook for, the New Zealand economy.

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Our Symposium 2015 Faculty debated their high conviction ideas on the drivers of, and medium-term (two to three year) outlook for the markets.

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Despite a genuine desire to invest in New Zealand on behalf of a substantial Australian superannuation fund, after several years of trying, no money has been invested.

For investors, one of the most important events of 2014 was the dramatic collapse in the oil price. The long-term equilibrium price is now likely to be lower. Overall, portfolios must be repositioned for increased volatility.

Nick Langley | 0.50 CE

World-wide low interest rates are not a temporary phenomenon. The world has changed and it is highly likely that the current low rate environment will be with us for decades. Getting used to low rates will be a critical adjustment for all investors to make in the coming years.

Tim Farrelly | 0.50 CE

Slow growth is an old story. The new story is that world is finally beginning to re-balance - a process that unfortunately will take another 20 years. Well-intended policies are causing bubbles and distortions to asset prices.

Robert Gay | 2 comments | 0.50 CE

The outlook for the global economy is unambiguously positive. At long last, all regional economic cylinders are firing in unison and secular stagnation is yesterday's story.

Jonathan Pain | 1 comment | 0.50 CE

PortfolioConstruction Forum Publisher and Symposium NZ 2015 Moderator, Graham Rich, opened Symposium NZ 2015 in his usual thought-provoking (and entertaining) way, highlighting key issues to consider over the jam-packed, marathon program.

The ACSI Governance Guidelines, which hold a wealth of information about what constitutes good corporate governance, are a valuable resource for any investor (or business owner).

When combining managers together to form a multi-manager global equity portfolio, investors should aim to keep active share relatively high.

The collapse in oil prices in the second half of 2014 is very large in a historical context. This paper explores the implications for portfolios.

Investment managers have a better chance of adding alpha if they have a clear philosophy of how they generate it, according to research on the importance of a robust investment philosophy.

In recent years, academics have been at war over whether the small cap premium exists. This recent paper finds it does - if you control for quality - and that it is significant, and not time or market specific.

Fund research is something of a dark art - there is little quality information available on how to go about it. But here are two great papers covering qual and quant analysis of funds and managers.

Indexing, as I have written before, is a form of socialism, since capital is allocated not as it should be. It is hard to think of a more stupid way to allocate this scarce resource.

Even the most skillful active managers will sometimes underperform. And, in some market environments, most active managers can be expected to underperform.

Fundamentally, there are three ways to make money in financial markets. A well structured, well-diversified portfolio should encompass all three, across all geographies.

Even if it's not your intention to recommend stocks, understanding financial analysis in general and ratios in particular, can enhance your ability to analyse equity funds.

PortfolioConstruction Forum Academy Autumn Seminar 2015 featured four sessions. This Resources Kit contains the materials for preparing for the Seminar, as well as the presentation slides.

When faced with a huge majority of experts expecting international equities to outperform Australian equities, I blurted this out. I was wrong, and on a few counts.

The recent listing of the Magellan Global Fund has essentially introduced a new structure into the ASX-listed and quoted fund universe. With more choice comes more complexity.

In this seminal paper, Ibbotson confirms that after the decision to actually invest is made, asset allocation and manager selection are equally important.

Investing globally is increasingly popular with the expectation of a continued weak AUD being a big driver. But easy currency gains may have been had.

Lower 'neutral' monetary policy rates across the developed world will continue to serve as an important anchor for the secular valuation of all asset classes.

Robert Mead, PIMCO | 0.50 CE

Bond markets were once the world's most liquid. Today, trading even $5 million in bonds can be difficult. Managed fund holders must recognize that funds may limit withdrawals and hold larger cash balances.

Differentiation is key for emerging markets. Secularly, countries enjoying the rise of consumerism are expected to drive local company earnings above the global norm.

Japan has become a nation to which many investors are largely indifferent. But individual Japanese stocks offer some of the most compelling asymmetric risk/return profiles within the equity landscape.

After a run of historically rapid improvement in living standards in the first decade of the millennium, emerging markets will face a more challenging outlook - not a crisis - over the next few years.

PortfolioConstruction Forum Academy Summer Seminar 2015 featured four sessions. This Resources Kit contains the materials for preparing for the Seminar, as well as the presentation slides.

Is the practice of measuring manager performance by comparing it to a market index distorting prices across the whole market? That is the conclusion of a recent paper.

Share repurchases have recently been receiving a lot of press, much of it critical. We see dividends and share repurchases as equal ways of returning excess free cash flow to business owners.

The real distinction in retirement income philosophies is not about which are "safe" and which are not. It is whether risk is transferred or retained (and if retained, managed).