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.
Mood dampened for advisors due to global risks
(Pictured: Rob da Silva)
The tone was a little downbeat at the annual van Eyk Research conference in Sydney last week, with key speakers focusing on the various risks facing the financial world. The conference is historically one of the major influencers of the mood of the retail advice industry.
The major themes were similar to those similarly downbeat from one of the other influential conferences, the markets-themed Portfolio Construction Forum Summit in February. And judging by the program for Morningstar’s conference coming up next month, planners are being swamped with risk assessments this year. What a difference a year makes.
Rob da Silva, van Eyk’s deputy CIO and head of manager research, said the current economic landscape was full of major economic and political threats, which had the power to devalue assets and destroy wealth. He said the five biggest challenges facing investors were: the unwinding of monetary stimulus by central banks, deflation across Europe and in the US, a further slowdown of China’s growth, and political instability and rising debt levels in the emerging markets.
“Unfortunately, 2014 is unlikely to be as clear cut as 2013 which was an exceptional year for risky assets and a tale of woe for fixed income markets… The volatile economic environment and the change in valuations, with global equity markets delivering returns in the range of 20 per cent to 50 per cent last year, have made assessing the markets a very difficult task.”
He told delegates to “get comfortable” with Fed tapering and the jittery markets that often followed any mention of it by central bankers and financial commentators. He urged investors not to get caught up in the mania and panic that ensued after the release of vital economic data and to avoid costly buying and selling.
“Tapering is here and the Fed has the difficult task of withdrawing its buying support of US Treasuries without upsetting the progress of a consistent but fragile economic recovery. At the same time, core inflation in the US has been in a downward trend while unemployment remains higher than acceptable. This must be reversed to avoid the possibility of inflation. Europe is grappling with similar issues and may require further easing.”
Andrew Hunt, a London-based economist and consultant to van Eyk, similarly warned that rapidly falling inflation in the US, Japan and throughout Europe was a serious problem, and demonstrated the failure of quantitative easing policies to stimulate growth.
“If the world wants to avoid a deflationary event and raise both global liquidity growth and global economic growth, it needs monetised fiscal expansion similar to that witnessed in 2010 and 2011,” he said. “Currently, this approach appears to be out of fashion and so the threat of deflation will remain high in the first half of 2014.”
Hunt said QE (quantitative easing) employed by the US Fed and other western central banks had unintentionally created the wrong form of money. It had flooded the economy with “base money” which circulated within the banking system rather than putting more “broad money” in the hands of everyday people. As a result, QE had not increased the wealth of the average household or lifted consumer price inflation.
