Modern Portfolio Theory is being updated with new technuiques that take advantage of the vast computational and information-aggregation capabilities available in contemporary financial markets. Increasingly, frequent non-normal returns and dramatic swings in valuations suggest that management of tail risk may emerge as a new frontier of asset allocation.
Investment flows to and from emerging markets are notoriously volatile. From recently compiled figures, there also seems to be a big disconnect developing between what pension funds are doing and what mutual funds are doing.
The figures from US mutual fund researcher EPFR Global showing an accelerating flight by mutual fund investors from emerging markets in January and early February (see separate report this edition), are in stark contrast to the continued strong institutional investor inflows into most emerging markets.
Institutional investors should take heart from this disconnect because it provides yet further evidence of the potential benefits which will come from taking a long-term view.
The EPFR report notes that outflows from emerging markets began in the December quarter last year and picked up in January and early February as the Egyptian political crisis unfolded. The early outflows were probably due to profit-taking and the later ones probably due to panic.
Institutional investors do take profits, true, but they tend not to panic. In a crisis, institutional investors, either by design or accident due to their governance structures, tend to do nothing. This normally ends up being the best course of action.
Michael Lipper, one of the most experienced collectors of mutual fund investment information in the world, as founder of Lipper Advisory Services, is always looking for something which can force a meaningful deviation from a current trend. He is also an ardent blogger so it’s not difficult to discover what he’s thinking from week to week.
In his latest blog last week he admitted that he had probably over-reacted to the “blood in the streets” of Cairo and that, on reflection, there was unlikely to be a lot of market contagion following the eruption of political unrest. On further reflection, he said, there was also unlikely to be a really messy succession for Egyptian leadership.
Lipper is a CFA and former president of the New York Society of Security Analysts as well as founder of the Lipper performance measurement indexes and tools. If he can react to a political eruption and then quickly re-address the situation, where does that leave less-informed investors?
Lipper claims to be relatively bullish longer-term but he has a lot of worries. He thinks, for instance, that the number of “truly cheap” investments has shrunk in recent months. What he is worried about is a “second supply cycle” of good economic news.
The second supply cycle deals with the production of securities, funds of various types and derivatives which are built to give investors and speculators ways of participating in the first cycle of good news.
He uses the current example of gold: the size of the “paper gold” market is considerably larger than not only annual gold production and consumption but may also be approaching the amount of gold held by the world’s central banks. This sounds a lot like the derivatives market which supported the US mortgage boom, until it went bust.
Lipper’s advice is to stay with present “sound” investments and continue to deploy cash reserves. He expects the next peak in 2013.
Civil unrest in Egypt, in particular, and other Middle-eastern and some African countries has been blamed for causing further investor outflows from emerging markets in recent weeks. (more…)
CalPERS will separate its real estate assets into legacy and new portfolios, as part of a new strategic plan for the asset class that more accurately reflects its evolved role as a result of the fund’s recent asset liability study.
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It’s not really news but it’s comforting to have your observations confirmed when the annual Global Pension Asset Study is published. The Towers Watson report for 2010 shows a hiatus in the swing away from equities, stronger growth in Asia-Pacific than elsewhere, and a greater focus on risk by the major funds in the world’s top 13 pension markets.
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Subjecting money market funds to a bank-like regulatory structure would disrupt the short-term money market and increase systematic risk according to this Yale Law School paper. While risk-limiting reforms are important to ensure the continued safety and security of MMFs, this paper argues major revisions such as the floating NAV requirement or bank-like regulation would destabilise an industry that has been remarkably stable. (more…)