Five years ago, my firm, CREATE Research, first partnered with Principal Global Investors to examine trends within the asset-management industry. Many things have changed since 2009; one of the biggest changes has been how defined benefit and defined contribution plans have altered their approach to asset-allocation strategies. The infographic below brilliantly details how investor behaviors have shifted from “wants” to “needs” over the past five years. I encourage you to download the entire survey, entitled “Asset Allocation Leaders, Laggards, and Newcomers: 2009 – 2013.” You can read the full trends analysis and other research at create.principalglobal.com.
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169,000 new jobs in August. Sounds pretty good…unless you were expecting 180,000. Combine that with June and July gains getting revised down by 16,000 and 58,000, respectively…and you get something that falls somewhere between ‘super tepid’ and ‘lackluster.’ So, when the Federal Reserve meets next week, what will they think about jobs numbers and how will that affect their tendency toward tapering?
Year-to-date average monthly payroll gains sit at 180,250. That’s lower than the average in 2012, and more importantly, it’s lower than the rate of 200,000 that some FOMC members would prefer to see before cutting the pace of bond purchases. Of the combined June-July revisions (-74,000), an unusually high amount (over half) came from local government – mostly education. Read more
If you haven’t heard mention of it in the news, or read about it in the papers or your portfolio manager’s commentary, there’s an election coming up in Germany. It’s important too! The outcome of this election has implications well beyond Germany, and well beyond Europe. In this post, we’ll look over the basics of the election, so that you’ll know how to make sense of the results when they come later this month.
First, why is this election so important? There are a couple of main reasons. Germany is one of the main centres of gravity for the European Union. Their export-driven economy is the engine driving a nascent EU recovery, and Germany’s ability to continue churning out that growth is highly interrelated with the domestic policy agenda of the government. Secondly, Germany’s one of the big wheels in the EU and almost nothing gets done without its approval. Read more
Let me set the stage. The price of oil is up over 7.5% in the past month. We’re looking at the beginning of the end of quantitative easing in the United States and the consequent rise of interest rates. Escalating mortgage rates could frighten potential homeowners back into renting. We have a raging (as well as politicized) debate as to who should be our next Fed chair. Financial markets and currencies from many emerging economies are hitting the wall. The U.S. government is about to enter a protracted debt-ceiling debate. And, as if this is not enough, we now have a possible U.S. intervention in the Mideast that could rattle worldwide financial markets. The winds of war may breach any national border.
With this backdrop in mind, the question we must pose is this:
Setting aside the moral, ethical, and political conundrums of a U.S. intervention in Syria, how should we expect financial markets to react when conflict in the Mideast flares up? Read more
Preferences change. Tastes develop over time. You probably appreciate more and different foods than you did when you were a child. You change your diet to meet your needs – foods to benefit your heart, your cholesterol, your weight. You may even have a special menu designed specifically for you by a doctor or dietitian The investment industry is seeing a marked shift towards an era where this kind of evolution and customization will be key to success.
For years, investment managers have taken alpha to mean “beating a benchmark.” Alpha, as traditionally defined, is the excess return earned above a market index through active management. The manager was given a target and expected to beat it. That flavor of alpha is now giving way to solutions alpha. Read more
In a perfect world, a diversified portfolio would have asset classes that are uncorrelated, allowing an investor to maximize return while minimizing risk. As every high yield portfolio manager has probably told you, high yield bonds have had low correlations with other asset classes, and they can offer attractive risk-adjusted returns. This low level of correlation has allowed investors to benefit from allocating to high yield bonds. According to Barclays, monthly high yield bond-return correlations have been negative versus U.S. Treasurys over the past twenty years. Obviously, that correlation statistic includes a time period of declining Treasury rates.
So what have correlations done during the most recent increase in rates?
Despite what feels like a 1.00 (perfectly positive) correlation to rates, high yield bond daily-return correlations to the Barclays U.S. Treasury 5-7 Year Index since May 1 are elevated, but still remain relatively low, only 0.20 (unless otherwise noted, all performance information is as of August 27, 2013). Read more
Imagine you’re aboard a flight that’s on its final approach into the Indira Gandhi International Airport in Delhi, India. For most of the flight, the plane, a 787, has been traveling at about 903 km/hour (that’s around 560 miles/hour). As the flight attendants collect that last few plastic cups, the plane starts to slow and banks gently to line up with the runway. The man next to you, oddly distraught over the change in airspeed, yelps as the pitch of the engines audibly lowers. Panicking, he unbuckles his seatbelt, stands up and yells, “It’s slowing down!! Why is it slowing down?!? I’m bailing out!!”
While you’d never expect this sort of thing to actually happen on a real flight to India, something similar is happening with emerging market investors. Read more