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Anissa Cavallo |
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Managing Director |
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Dear Milton,
Asset Allocation and portfolio construction theories are often thrown into turmoil during a bear market. Advisers begin to question their current investment portfolios that have probably suffered under prolonged market losses. This month we tackle one of the favorite debates over Tactical versus Strategic Asset Allocation. Our resident researcher and professor, Robert Brooks, shows that whilst hindsight provides wonderful economic fodder, cycles can be extremely difficult to predict. Andrew Kuruc, Western Australian BDM and guest provider proves the case for active asset management. We have our very first edition of Voice of the Adviser, with an informative and compelling argument for a Strategic Risk Approach (SRA) presented by Queensland adviser Adrian Headon. Finally Tom Elliott, our fund manager expert, reiterates the difficulty associated with predicting markets.
Perhaps the notorious Nassim Taleb’s general contempt for quantitative models is rightly founded. He contends that statisticians use complicated equations simply to hide their overall incompetence. Famously (and vocally) Taleb criticizes the illustrious Nobel Prize in Economics for promoting economic theories based on a misunderstanding of risk! He points specifically to the 1990 prize awarded to Markowitz where he says the theories had already been undermined by the stock market crash of 1987.
Indeed it seems that in financial planning the only sound theory is the theory that nothing is sound. The modern adviser needs to stay abreast of more than simply asset allocation to truly add value to their clients. |
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Andrew Kuruc |
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WA & NT State Manager BDM DIrect |
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| IS THERE A NEW INVESTMENT HORIZON? |
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It’s probably fair to say that during and following a significant market correction, the average investor’s time horizon shortens somewhat. This happens on two counts: first they ask, “how much longer can I afford to leave my money in the market?”, and second, “how quickly can I recoup my losses?”
A basic rule of investing is that it is mathematically harder to recoup an amount than it is to lose it. For example, if I have $100 invested and it drops in value by half (50%), I am left with $50. In order to get back the $50 I lost, my investment will now have to double (100%). This simple rule leaves advisers with a complex dilemma: How to help their clients achieve a greater return over the same time frame, or the same return over a shorter time frame.
As a result, some advisers feel that they may need to change the way they have created investment portfolios as they question whether traditional methods have failed over the past three years.
READ MORE |
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Tom Elliott |
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Managing Director MM&E Capital |
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| ASSET ALLOCATION POST THE GLOBAL FINANCIAL CRISIS (GFC) |
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As investors sift through the bitter ashes of their super funds after the end of the annus horribilis that was the 2008/09 financial year, some pointed questions are being asked of financial planners and fund managers. Unsurprisingly, these questions include the following:
"Why didn't you know this was going to happen?"
"Why didn't you go to cash at the start of the year?"
"How come all those supposedly non-correlated hedge funds have lost money just like the rest of the market?"
And so on.
READ MORE |
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Professor Robert Brooks |
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Department of Econometrics and Business Statistics, Monash University |
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| INVESTMENT STYLES AND ASSET ALLOCATION |
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The work of Harry Markowitz in the 1950s for which he was awarded the 1990 Sveriges Riksbank Prize in Economic Sciences, also known as the Nobel Prize in Economics provided the basis of modern portfolio theory. His theory which can be applied to a range of investor preferences relied on mean-variance analysis of the risk-return trade-off. Assuming the set of investments are suitably diversified across a broad range of asset classes, Markowitz’s work produces the “optimal” investment portfolio (OIP). The OIP’s expected return is greater than any other with the same or lesser risk, and lesser risk than any other with the same or greater return.
In his prize lecture Markowitz identifies the need for further research in to when ``the mean-variance approximation is good, bad and marginal’’ , and also for the possible role for ``state-variables’’ in portfolio allocation decisions. In thinking about the literature on the so called state-variables we are thinking about how other economic, financial and accounting variables might influence the portfolio allocation decision. A state variable is a statistic that has enough predictive power to influence a portfolio allocation decision, for example a PE ratio or inflation figure.
READ MORE |
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FUND UPDATES |
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Voice of the Adviser
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Adrian Headon from Headon Financial Planning shares his past and present views on investing....here |
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