With the Federal Reserve today moving away from zero with a 25 basis point move, has anything changed my view that bond yields will stay lower for longer? I don't think it has. 2016 should be a very interesting market environment
The addition of the Chinese renminbi to the IMF's basket of reserve currencies is likely to accelerate foreign access to China's debt markets, one of the most significant milestones in integrating China into the international financial system.
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.
Today's slowdown is truly global, with economies everywhere contributing to it. We witness "disappointing" growth, quarter by quarter, year after year. The consensus pays too much attention to China as the cause. So what really is behind all this?
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.
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.
We examine four situations where individuals make poor choices and review the research to show where the brain makes those decisions. In each case, we present some ideas about how to overcome the potentially suboptimal choice when it comes to investing.
Financial pundits routinely claim that US inflation is much higher than the reported statistics. Viewed over the longer term, however, US inflation is far lower than reflected in the published data, according to economist, Dr Woody Brock.
With just an App, your smartphone can challenge an entire industry segment. Yet in investment management, superannuation and retail wealth management, we continue to do things much the way we did in the past. It is doubtful things will remain this way for long.
Since Angela Merkel singlehandedly opened Germany's borders to refugees, asylum seekers, migrants and any other nomads, the continent has been plunged into chaos. It threatens to wreck the European Union - or, at least turn it into an entirely different organisation.
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.
In Putin's third presidential term, dissidents are routinely dubbed deviants, fifth columnists, and traitors, as the regime leads a drive for national unity based on religion, tradition, and paranoid rhetoric. For the moment, Putinism is the only game in town.
According to a Harvard Business School study, the percentage of US GDP attributable to the financial industry tripled from 1950 to the 2000s. Has any of this increase improved the services rendered by the financial services industry to the real economy?
The idea that financial markets are too focused on the short term is gaining ground in the media, academics and now, politicians. Upon closer inspection, the supposed negative consequences of investor short-termism appear not to be happening at all.
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.
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.
Focusing on a client's investment portfolio alone ignores their greatest asset - their ability to continue earning income through the fruits of their labor, also known as their "human capital". Deciding how much risk to take with financial capital given a client's human capital risks is crucial.
Turmoil often provides a fantastic opportunity to reassess one's portfolio - and we're currently going through exactly such turmoil. The question is: what are the critical issues that investors should focus on as they rethink portfolio positioning today?
In all of '87, '98, '05 and '15, the US economy was close to full employment, inflation was tame, commodity prices low, EMs were under financial strain, volatility roiled financial markets, the US dollar was strong, and US monetary policy excessively generous. What followed?
Yellen has confirmed what should have been obvious all along - the Fed is not indifferent to international financial stress and its risk-management approach remains strongly biased in favour of "lower for longer". But four things about US monetary policy are frequently misunderstood.
The Australian residential property market is stretched. But about to crash, triggering a recession? It's nuts and you can clearly see it's nuts.
The progress we have seen in European markets in 2015 is sustainable over the next 12 months. But, investors should temper return expectations and anticipate continued market volatility.
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.
Fears that China's economy is teetering on the edge of collapse are exaggerated. But it is slowing. And the slowdown will inevitably highlight problems that until now have remained largely hidden, triggering fresh bouts of market volatility.
If you want to understand falling oil prices, forget Chinese consumption and focus on Middle East production. And, if you want to understand the world economy, forget about stock markets - focus on the fact that cheap oil always boosts global growth.
This week's market correction is long overdue. It is also not over because the true underlying problems are much more serious than the commonly cited causes. And, at last, markets are teaching Xi and Li who in fact is the boss.
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.
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.
The danger that “sequence of return risk” can devastate a retirement portfolio is both increasingly recognised and frequently misunderstood. Three concrete, research-driven strategies can help manage it.
Portfolio construction specialists face a new set of challenges. What matters is the ability to deliver a robust and predictable outcome. This requires institutional capabilities.
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.
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.
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.
EM policymakers have wasted their commodity-fueled Goldilocks Era and are sitting at a crossroads. Without a dramatic policy shift, EM are a value trap, if not an outright bubble.
It's been almost 24 years since Australia's last recession. It could be said Australia is “due for one”. While it would be foolish to say that the chances of a recession in Australia are zero, it's also wrong to say that they are over 50%.
Special one-off factors have underpinned Australia's record expansion. The key to forecasting the next Australian recession lies in forecasting the end of cheap money – if correct, then clearly a major investment crossroad for all Australian residents and investors.
With traditional asset classes expensive and historically low yields on bonds compromising their role as a diversifier, investors are at a crossroads. Investors should be looking for alternative sources of return and genuine diversification.
Recent stock market volatility demonstrates that asset price growth expectations can’t be taken for granted in China, despite intervention from policymakers. The bursting of China’s property bubble poses a major risk to the stability of China and the global economy – and a critical dilemma for investors.
QE has driven a search for yield globally, resulting in a unique Australian experience that has seen the major ASX indices become increasingly concentrated. We are at the crossroads for active Australian equity management.
The US Federal Reserve is (reluctantly) ending a long period of abnormally low rates. Investors should consider flexible benchmark unaware approaches in their fixed income portfolios, to potentially mitigate adverse market conditions going forward.
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.
Consumers and the energy industry are at a crossroad. Customer choices are impacting different parts of the energy supply chain, but energy networks themselves are insulated from emerging technologies.
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.
Our panel debated the contrasting views of the two presenters who addressed this "crossroad" - that rates are likely to go higher than most expect over the next three years vs that markets will go on tolerating lower interest rates for far longer.
The view that markets will go on tolerating lower interest rates for far longer is the more benign, market friendly (almost bullish) outlook than the common thinking that higher interest rates will be good.
With the Fed signalling its intention to raise rates, there is great disagreement about the quantum of rises ahead. Rates are likely to go higher than most expect - and the risk of a material equity market correction is elevated.
It is time to properly account for risk characteristics of client’s most valuable asset - their human capital. This isn’t easy to implement and places practitioners in a difficult situation...
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.
Investors should not buy stocks merely based on their volatility (or other risk) characteristics, but also take into account factors that are known to have a large impact on returns, such as valuation and momentum.
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.
Investors can substantially improve the risk/return characteristics of their strategic asset allocation by considering not only the classic equity premium, but also other premiums present in the equity market.
The increasing concentration of the Australian stock market indices is mirrored by the concentration of the Australian funds management industry. What does this mean for alpha generation?
There are three escapes the Fed had to make in order to declare its mission a success - escape from a liquidity trap, escape from quantitative easing, and, escape from the zero bound. Only the last remains. Will it achieve its great escape? Probably.
High active share is often profiled as "better" but such portfolios can exhibit risk concentrations which may lead to volatile return streams. Low active share funds should not be excluded from asset allocators’ tool kit.
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.
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."
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.
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, generating equal or better retirement spending, even while being conservative enough to not require a spending cut in the event of a market pullback in the future.
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.
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.
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.
This is a special interest subsection of our wider Perspectives library in which we present research and opinion about lifecycle investing issues.
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.
Will low interest rates be with us for decades? Or are higher rates ahead? Our Academy panel argues the case for "lower for longer" versus "back to higher" - and the implications for portfolios.
Four "big picture" geopolitical conditions will affect policy and markets going forward - in order of importance, the South China Sea, Russia returns, the end of Sykes-Picot in the Middle East, and the unwinding of the EU.
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.
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.
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.
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.
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.
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.
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.
What return premia - if any - are attached to different types of investment risk? And just how reliable are those premia are in practice? Can the risks be diversified?
It’s possible, or more likely probable, that for future generations, our money will run out before our body does. This means that our historical models of accumulation and decumulation will not work for future generations.
As we all brace for lift-off in the key US Federal funds rate, a robust, top-down macro perspective will be even more critical to the success of portfolios than ever.
Our Symposium 2015 debated their high conviction ideas on the drivers of, and medium-term outlook for, the New Zealand economy.
NZ has plummeted down the global income per capita rankings from third in the 1950s to 23rd in 2015. Successive governments have done little to reverse the decline. Why have we failed to regain our position?
Our Symposium 2015 Faculty debated their high conviction ideas on the drivers of, and medium-term (two to three year) outlook for the markets.
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.
Returns in defensive equity yield and income sectors have been outsized as bond yields have fallen. Growth sectors have underperformed. But globally, technology shares are cheap on a relative basis.
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.
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.
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.
With NZ fixed interest portfolios arguably harder to build than ever before, this paper introduces a framework for practitioners to build fixed interest portfolios for to meet the needs of individual clients.
Globally, technology shares are cheap on a relative basis. Tech investing has significant challenges but it remains the fastest growth segment and appears to have attractive valuations.
When combining managers together to form a multi-manager global equity portfolio, investors should aim to keep active share relatively high.
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.
We are reminded daily that the US stock market has achieved record highs between 2009 and today. But the true bull market covers 35 years. What does an understanding it tell us about the future? The answer is: a lot.
This paper by Rob Arnott and Denis Chaves looks the effects of different age cohorts on GDP and asset class returns.
The world was shocked by the oil price collapse. Anuraag Shah, who made a fortune betting on a falling oil price, summarised the astonishment - "It's nuts!". Actually, it isn't.
In this not-to-be-missed session of a not-to-be-missed program few prisoners were taken in debating the moot "overweight int'l equities, underweight Au equities.
In this simulated investment board meeting, our day's 17 international and local Faculty members debated and voted on whether to overweight international equities and underweight Australian equities in portfolios on a two- to three-year view.
In 2014, we witnessed the return of market volatility. With potentially significant market return and volatility, investors should consider portfolio positioning before the fact.
The fourth D confronting investors - the disruptions wrought by technological change. Cash cows, thoroughbred stocks and roll-ups are best placed in a world challenged by the four Ds.
While demographics will still dominate into the future, energy and automation are quickly rising to be just as important with significant implications for portfolios.
As its capital markets develop, the macro picture improves, inflation comes under control, and the economy grows, India's credit and rates markets present a compelling opportunity.
Since Q4 2014, oil prices have plunged, currency markets are at war and intraday volatility of stock indices is disturbing. A crisis mode has started. Asset allocators must mitigate risks before this next crisis inevitably hits.
One of the most important events of 2014 for investors was the dramatic collapse in the oil price. Overall, investment portfolios must be repositioned for increased volatility.
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.
Emerging markets will face a more challenging economic and financial outlook over the next few years - but systemic risk across the emerging world is lower than before the Asian crisis.
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.
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.
The US secondary corporate bond market is in a time of significant upheaval. Changes to regulations has caused a new, insidious liquidity risk.