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Top 16 Investment Papers in May 2016

Savvy Investor is a major new knowledge network with a focus on curating the best pensions and investment white papers and articles, news and blogs from around the web. These were our most viewed and trending papers from the last month:


The Free Lunch: The Value of Decoupling Diversification and Risk (Salient)
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.

Scientific Beta Multi-Strategy Factor Indices: Factor Tilts with better diversification
​EDHEC believes that the present state of smart beta approaches provide only partial answers to the shortcomings of market cap-weighted indices. This 70 page paper introduces Scientific Beta Multi-Strategy factor indices as a superior approach to equity investing, described as "smart factor investing". The paper explores the problems of cap-weighted indices (their heavy concentration and exposure to unwanted factor risks), and examines how a suitable set of risk factors might be identified. The authors then investigate factor tilts can be combined, to provide exposure to rewarded risks, whilst diversifying away unrewarded risks. The paper demonstrates how this approach leads to a significant improvement in risk-adjusted returns. The final chapters of the paper discuss the Scientific Beta Multi-Strategy factor indices; in particular examining their investability and robustness.

Front Office and Asset Management Salaries 2016 - New Surveys
Our most read surveys cover compensation benchmarks for different positions within UK Front Office and Asset Management, US Asset Management, Canadian CFA Charterholders and Asian/Australian roles.

Brexit Barometer - The probability of BREXIT and "polls of polls" (updated daily)
What is the probability of BREXIT? In the next few weeks, you can keep abreast of the latest polls and probabilities here. We'll keep the scores updated day-to-day. We'll record the scores of three "polls of polls" and three measures of implied probability.

The Siren Song of Factor Timing (Cliff Asness, 2016)
Can investors time markets - or factors? Is it worth trying? Passive factor investing is usually implemented on a fee scale somewhere in-between the normal levels for active and traditional passive management. But factor timing creates the potential for skill-based alpha, which justifies higher fees. Back in February, Rob Arnott wrote a paper, “How Can ‘Smart Beta’ Go Horribly Wrong?” arguing that the investment returns of many smart beta factors were being driven by the sheer weight of new money following these strategies. As a result, a "smart beta crash" could occur at some point - perhaps the potential merits of the smart beta approach were not being applied in a very "smart" way. This paper by Cliff Asness provides a robust response to Arnott, arguing that it is folly to rely on the timing of market factors. He argues that the historic performance of factor timing strategies is weak and some of the back testing is dubious. Instead, he suggests that investors select factors carefully, based on long-run considerations, and use a multifactor approach, diversifying across a factors. He doesn’t say you should NEVER try to time factors, but as with market timing, it shouldn’t be relied upon to create long-term alpha.

Long-Termism vs Short-Termism: Pendulum set to Shift? (S&P Dow Jones)
Kelly Tang, CFA and Christopher Greenwald, PhD of S&P Dow Jones Indices have co-authored this paper. In it, they examine the short- versus long-term debate, analyzing how institutional investors are suggesting to minimize short-term thinking. They explore how integrating long-term metrics is a crucial step in the transition to long-term thinking.

Leaving the EU: Implications for the UK financial services sector (PwC)
This 48-page paper by PwC analyses the potential impact on the UK financial services sector of a "Brexit" from the EU. The authors provide two alternative "Brexit" scenarios - the FTA scenario and the WTO scenario.

Have Emerging Markets bottomed? The signs to look for (Nikko AM)
In the last couple of years, capital has been leaving emerging markets, driven by lower growth expectations and concern over higher interest rates in the US. But now, there appears to be a fundamental change occurring in emerging markets. After years of under-performance, the outlook is brighter. Valuations are more attractive and capital flows may be turning around. Is it too early for asset allocators to commit again to emerging markets? What are the indicators - the signposts - that investors need to see, in order to believe that capital should be committed to the asset class? Two leading Global Emerging Market debt experts from Nikko Asset Management weigh the possibilities of a sustained upturn in this long-suffering asset class.

Survey of Large Pension Funds and PPRFs Long-Term Investments (OECD)
This comprehensive 56-page report by the OECD provides interesting insights into the performance and investment behaviours of the world's biggest institutional investors, examining in depth the trends observed at a national and regional level.

ESG - Road Blocks or the Road to Integration? (FTSE Russell)
This 7-page report by FTSE Russell examines some of the perceived hinderances to applying an ESG framework to the stock selection process. It provides practical insights for achieving successful integration. 

UK Fiduciary Management Survey 2015 (Aon Hewitt)
This annual survey by Aon Hewitt provides a comprehensive and authoritative overview of the current landscape for Fiduciary Management in the UK. The report uncovers the experiences of those who have gone down a fiduciary route, describes how they have selected providers, reveals the criteria used for selection, and describes how they have measured performance. The report includes sections on the drivers behind the continued growth of fiduciary management, and the type/size of schemes that are fuelling this growth. The key benefits of using fiduciary management for UK pension schemes are also discussed.

Systematic Investing - made simple guide (PLSA)
This guide has been authored by the Pensions and Lifetime Savings Association. It examines the systematic macro style of hedge funds. The guide explains the concept, what it is and how it works. It also examines how it has performed historically and how an allocation can boost a pension scheme’s broader portfolio.

Active versus Passive: How You Can Get on Base (Segal Rogerscasey)
This paper by Segal Rogerscasey examines the ongoing debate between active and passive management, highlighting the pros and cons of both strategies. How can institutional investors calculate the probability that active or passive strategies will outperform, and how do they decide which approach is best for their situation? 

Brexit: What would it cost the world economy? (Pictet)
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.

Negative Rates Are Dangerous to Your Wealth (Chris Brightman)
Recently introduced Negative Interest Rate Policy in several developed economies means lower current yields and lower future expected returns resulting in lower accumulated wealth for those investing in these markets.

Unlocking the Credit Cycle (Loomis Sayles, May 2016)
The authors of this paper break the credit cycle into four phases - downturn, credit repair, recovery and expansion to late cycle - informed by their measures of risk appetite and liquidity.

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