Investment 101: Building blocks to successful asset management

The cement that holds it all together: Asset Management topics that get less airtime 

This blog post seeks to provide investors with a compendium of "investment 101" papers, featuring investment industry subjects that attract less ‘column inches’ than others, but nevertheless remain integral to developing successful outcomes. 

The Savvy Content Team has selected a collection of investment white papers covering subjects such as Risk Premia, Asset Allocation and Portfolio Construction which seek to inform industry participants about some of the ‘wallflower’ topics and issues that only attract irregular coverage.

 

RISK PREMIA AND VALUATION METRICS

Equity Risk Premiums: Determinants, Estimation and Implications (Damodaran, 2019)

Professor Aswath Damodaran investigates the economic determinants of equity risk premiums and notes limitations in the standard approach to estimating the equity risk premium. He goes on to examine other approaches and indicates why such approaches lead to different values for the equity risk premium.

The P/E Ratio: A User’s Manual (Epoch Investment Partners, 2019)

Epoch contests that most managers 'misuse' the P/E ratio, but that when used 'correctly' it can still prove a useful tool in investment analysis.

Understanding and measuring the illiquidity risk premium (Willis Towers Watson, 2016)

In this report, Willis Towers Watson examines the concept of illiquidity risk premium as a way of generating additional return in a low yield environment and offers 3 examples of where illiquidity premia are to be expected.

Understanding the role of alternative risk premia (Wellington Management, 2018)

Wellington explores four categories of alternative risk premia that they have found to be both persistent and potentially profitable and offers insights on the likely challenges of implementation, particularly with regard to portfolio construction.

STRATEGIC AND TACTICAL ASSET ALLOCATION

Strategic Asset Allocation: Determining the Optimal Portfolio with Ten Asset Classes

This academic study scrutinizes which other asset classes add value to the 'traditional' mix of stocks, bonds and cash, and then determines optimal weights for a portfolio.

Are rates and equities losing their balance? (MSCI, Sep 2019)

MSCI uses their new macroeconomic model to provide a new perspective on whether the benevolent 'hedge' relationship between bonds and equities, which has existed for most of this century, may break down under changing economic circumstances.

A Tactical Asset Allocation Workflow (Axioma, 2018)

Axioma suggests that a long-term account that passively tracks a strategic asset allocation, where asset allocations remain constant over extended periods, might benefit from shorter-term tactical asset overlays. These might be used either to de-risk the portfolio in times of market stress or to add alpha by aligning the portfolio more in tune with economic cycles.

Currency Hedging: An introduction (Meketa Investment Group, 2017)

Meketa provides an introduction to the nuts and bolts of currency hedging.

FIXED INCOME AND REAL RATES OF INTEREST

Foundations of High-Yield Analysis (CFA Institute Research Foundation, 2018)

This brief from the CFA draws upon presentations given to its High Yield Bond Master Class and 27th Annual High Yield Bond Conference in June 2017. Numerous aspects of the high-yield investment process were discussed, and insight was offered on developments within the specific asset class.

R* and the Global Economy (FRBSF, Aug 2019)

The authors investigate a number of potential explanations as to why interest rates have fallen over the long term, and pay particular regard to 'safe-haven' flows.

ALTERNATIVE ASSETS AND PORTFOLIO CONSTRUCTION

Private Assets: The Trade-off Between Liquidity and Performance (PGIM IAS, 2019)

PGIM considers the trade-off between liquidity and performance in the private asset market, suggests ways of measuring it, and discusses how this knowledge might enable investors to achieve an optimal mix.

Real Assets & Portfolio Construction for Institutional Investors (PGIM IAS, 2019)

PGIM proposes that real asset exposure within a portfolio could be managed as a distinct entity, using several strategies with differing investment characteristics to achieve a range of outcomes.

A Primer for Today's Secondary Private Equity Market (Blackstone, 2017)

Blackstone’s primer examines the secondary private equity market as it has grown and matured, addressing concerns about increased competition, “full” pricing issues and a perceived supply/demand imbalance in the secondary market.

PENSIONS AND ENDOWMENTS INVESTING

A Primer for Investment Trustees: Understanding Investment Committee Responsibilities(CFA Institute Research Foundation)

The CFA dissects the responsibilities of an investment trustee and offers insight into investment issues as they relate to this specific role.

Selecting Fund Managers and Consultants - What Do Trustees Look For? (Aon Hewitt)

This collaborative report from Aon Hewitt and Leeds University Business School explores the dynamic that exists between trustees, fund managers and investment consultants of UK DB schemes, with emphasis placed on the manager selection process.

Forecasting Investment Returns and Expected Return Assumptions for Pension Actuaries (2019)

This report explains how pension actuaries select or recommend expected investment returns, or assess capital market models provided by a third party.

An Introduction to Liability Driven Investment (Insight Investment, 2019)

Insight Investment addresses the concept of liability driven investment (LDI), how LDI strategies are constructed and implemented and offers suggestions as to how to consider what is the right approach for a scheme, depending on particular circumstances.

University Endowments: A Primer (CFA Institute Research Foundation, 2019)

This paper by the CFA provides a thorough insight into a niche area of the asset owner market, some of their idosyncracies, and how an almost perpetual investment time horizon offers them the flexibility to adopt novel strategies and be among the first into new asset classes.