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.
What we read this week, leading White Papers
Here’s three thought-leading White Papers to guide your decision-making during this pandemic. A half =-yearly update from the World Gold Council; S&P’s take on the active vs. passive debate; and the best way to hold infrastructure, from RARE.
All that glitters
World Gold Council Mid-Year Outlook 2020
After leading all asset class returns in the first half of 2020, delivering 16.8% in US dollar terms, gold bullion has become the must-have investment. In this White Paper, the World Gold Council provides its six-monthly update, highlighting gold’s ability to provide a hedge in both inflationary and deflationary environments, but particularly against the asset (rather than price) inflation that is occurring today. The link is available here
S&P Indices Versus Active (SPIVA) Report
Standard & Poor’s released its latest report comparing passive vs. active investment approaches,s with some interesting conclusions. While somewhat out of date, given that it measures the half year to 31 December 2019, there are some strong trends that are relevant to investors and advisers alike. Interestingly, 61% of Australian equity managers underperformed the index, while 54% of smaller-company managers actually outperformed. We will be very interested to see the 30 June results, given the common suggestion that active managers outperform in periods of volatility. The S&P report is available here.
RARE Infrastructure – Listed vs. Unlisted Infrastructure
RARE Infrastructure published an insightful post-COVID19 White Paper on the opportunity set in listed infrastructure assets. The authors highlighted the emerging opportunity in listed infrastructure, as opposed to the unlisted infrastructure assets preferred by global pension and industry funds. The benefits include the ability to adjust portfolio composition on the fly, rather than maintain 50+ year assets, and to benefit from arbitrage around regulatory pricing and market sentiment. This comes at an opportune time given the clear lag in unlisted asset valuations and the fact that listed infrastructure has fallen further, and faster, but likely offers better long-term returns. The article is available here.
