Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Investor case for economic transparency
Eaton Vance has mounted a case for both investors and governments to better appreciate the benefits of economic transparency on sovereign bonds.
In a research paper, ‘Economic Transparency Means a Creditworthy Sovereign’, the global manager looks at economic transparency as it correlates to yield spreads, credit ratings, stock price volatility, and trust in government across 130 countries.
The research shows no correlation between such transparency and the volatility of stocks or the level of trust in government.
Countries in Greater Europe tend to lead the rest of the world, with Germany having the most ‘transparent economy’, according to the study. The definition used is the “extent to which authorities provide timely, reliable and accessible information relating to fiscal and monetary policies and the general economy”.
The authors of the study are: Marshall Stocker, director of country research and portfolio manager, Erin Thornton, senior research associate, and Patricia Tan, global income (research co-op).
The report says: “We find that greater economic transparency correlates with lower sovereign yield spreads and better credit ratings. The empirical results are compelling evidence to support our continued efforts to engage sovereign issuers and recommend greater economic transparency.
“Conversely, we find that greater economic transparency does not correlate to greater volatility in a country’s capital market, as measured by stock price volatility.
“The trust in government that a nation’s citizens report is also not correlated to economic transparency,” it says.
“Altogether, our research demonstrates that both investors and sovereigns benefit from improved economic transparency, a ‘win-win’ outcome for ESG engagement.”
Eaton Vance uses the metrics in the economic transparency study to forecast likely asset valuation changes in real time for its own portfolios.
At the same time, the managers also uses the findings in its engagement program with policy makers. “We believe policymakers will be interested in knowing how to lower their borrowing costs and improve their credit ratings by pursing greater economic transparency,” the report says.
The researchers say that the Eaton Vance economic transparency index is unique from existing transparency indices because it covers a wider scope of countries, a greater number of variables (central bank, fiscal and economic transparency) and will be updated on an annual basis with a shorter lag time.
