Global Strategy Outlook

Asset Allocation and Strategy – some recent popular papers

As a former asset allocator myself, I find the current investment environment fascinating. From a monetary policy perspective, we are in uncharted waters. It's difficult to assess the "correct" levels of market valuations, and difficult to know the extent to which prices are skewed by the impact of quantitative easing.

The most popular asset allocation and strategy reports in the last month or so are a mix of strategy notes, longer-term thought pieces, and papers on aspects of the investment processes. We've excluded papers which are already out of date:

asset allocation

Momentum Investing and Asset Allocation (Berkeley Square, April 2016)
Using three asset classes to frame the discussion (Hedge Funds, Fixed Income, and Equities), Drew F. Knowles of Berkeley Square Capital Management demonstrates the use of a new quant approach to asset allocation. The sample portfolio was examined over multiple market cycles and achieved higher compound returns with less volatility.

The Investment Implications of an Aging World (PGIM, April 2016)
This paper examines aging populations, now a worldwide phenomenon, and seeks to identify investment strategy ideas that can be implemented by institutional investors. By 2040, the number of those aged 65+ will double from today's levels, to reach 1.3 billion. And it's not just a Developed World problem - two-thirds of the world's seniors live in Emerging Markets. The current aging trends will have profound implications for individuals, business and governments.

Brexit: What would it cost the world economy? (Pictet, May 2016)
The risk of "Brexit" is one of the top 'known unknowns' of 2016. Pictet Economist Jean-Pierre Durante uses two global models (of the kind used by central banks) to examine the possible implications of a "Brexit" for the world economy.

Expected Future Asset Class Returns for 2016-2020 (Robeco)
In this excellent 120-page document, Robeco present their forecasts for expected returns for major asset classes during 2016-2020. The authors argue that longer-term forecasting is more reliable than short-term forecasting. Valuation corrections, for instance, are impossible to forecast on a three month horizon, but over a five-year period, some reversion to normal valuations is likely to occur. Furthermore, the impact of unexpected economic or political developments is more likely to even out, during a five year time frame. Robeco forecast five year global equity returns at 5.5%pa.

China's Slowing; So What? (Byron Wien, Blackstone, May 2016)
An occasional commentary on the outlook for global markets from Blackstone Group's market veteran, Byron Wien.

Bank of America Reveals Nine "Reasons To Worry" About A Big Market Drop
Goldman Sachs recently came up with a few reasons why the market is headed for a material draw down in the next few weeks. Bank of America then came out with a few more! This article explores each one.

Brexit's Implications for Financial Markets and Beyond (Lazard, Apr 2016)
In this paper, the authors explore both sides of the “Brexit” debate and examine the political and economic implications for the United Kingdom and the European Union as a whole.

Long-Termism vs Short-Termism: Pendulum set to Shift? (S&P Dow Jones, 2016)
Kelly Tang and Christopher Greenwald of S&P Dow Jones Indices examine the short- versus long-term debate, analyzing how institutional investors can minimize short-term thinking. They explore how integrating long-term metrics is a crucial step in the transition to long-term thinking.

The Free Lunch: Decoupling Diversification and Risk (Salient, Apr 2016)
The authors of this very interesting paper discuss why considering diversification and risk independently may help investors build more efficient portfolios. They argue that asset allocators should rethink the impact of low volatility diversifiers in higher risk portfolios. Some low vol asset classes (e.g. hedge funds) may primarily have a “de-risking” impact, but not a "diversifying" impact. The paper demonstrates that, perhaps counter-intuitively, high volatility diversifiers can sometimes be very effective, and allocators should consider these strategies.

Chinese bonds and equities to join major indices? (JP Morgan, May 2016)
Reform measures opening up Chinese markets to overseas investors have driven speculation that they will soon be included in major benchmark indices. Ian Hui, Global Market Strategist at JP Morgan, explores further.