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.
SSgA sees positives in its seasonal manager greeting
(Pictured: Rick Lacaille)
The predictions for next year have started. Aided by a media which is still required to fill columns no matter what is happening, or not happening, fund managers and others are about to embark on their annual market forecasts.
The Sunday papers are particularly fond of these predictions, most popularly asking various high-profile professionals their forecasts for the Australian share market. Psychology plays a part in this game. According to Jack Gray, part-time academic at University of Technology Sydney and executive director of Brookvine, the most common prediction for the share market over a year ahead is ‘up 10 per cent’. The main reason for that, he says, is because people have 10 fingers and 10 toes.
First cab off the rank in the prediction stakes, for us, is State Street Global Advisors. The manager has identified several main investment themes for next year:
> Recovery will become more broad-based and self-sustaining in nature next year. The US looks set to enjoy accelerating growth. Europe’s recovery may still be fragile but economic activity levels have bounced off particularly low levels and the region is poised for modest growth
> Emerging markets typically benefit most from a global recovery and their long-term outlook remains positive despite a turbulent 2013. In 2014, emerging markets will be impacted by conflicting forces: a strengthening global economy on one hand but a strengthening dollar on the other. Valuations, however, are not demanding and expectations are low.
> In China, the ‘Chinese Dream’ initiative to reshape the economy by beginning the shift from an export-driven model is a positive development. SSgA anticipates growth of about 7.5 per cent in 2014, but risks still persist.
> Although the prospect of extreme risk events have diminished, there is still reason for caution as there are many complex interlinking parts and growth remains sluggish. Stress points remain and the normalization of monetary policy could prove challenging.
Rick Lacaille, global CIO at SSgA, said: “If stabilisation was the message in 2013, recovery is the watchword for 2014. While we are not discounting potential risks, like government and central bank policy changes or geopolitical issues that could disrupt the growth story, there are plenty of positives to catch the investor’s eye for 2014.”
