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Perspectives
The losses reported from the so-called sub-prime category and the collateral damage suffered by some councils has brought renewed scrutiny of their financial viability and the investment practices which ... Read moreThe losses reported from the so-called sub-prime category, and the collateral damage suffered by some councils, has brought renewed scrutiny of their financial viability and the investment practices which are employed across the local government sector. The diversity of prudential investment standards which currently apply in Australia also suggests that the investment policies expected to deliver optimal economic outcomes for rate payers require reform. In conjunction with the moves to address the financial sustainability of the sector, this paper argues that reforms are needed to standardise investment powers, empower councils to develop appropriate investment objectives, and to centralise funds management.
The degree of competition in the Australian banking and non-banking lending sectors is critical to both enhancing housing affordability as well as providing an efficient supply of funds to both corporates ... Read moreThe degree of competition in the Australian banking and non-banking lending sectors is critical to both enhancing housing affordability as well as providing an efficient supply of funds to both corporates and small and medium enterprises (SMEs). It is with this firmly in mind that we make this submission to the House of Representatives Standing Committee on Economics and its Inquiry into Competition in the Banking and Non-Banking Sectors.
The tide of articles on inter-generational themes in financial services literature has fallen away in recent times. Perhaps the topic has been overdone or more probably climate change oil price hikes ... Read moreThe tide of articles on inter-generational themes in financial services literature has fallen away in recent times. Perhaps the topic has been overdone or, more probably, climate change, oil price hikes, the credit crunch, the economic slowdown, the savage fall in equity markets and increased volatility have all taken the headlines away from it. The latter phenomena flare more brightly and correct more sharply than slower working forces like demography, but the pendulum will swing back at some time because intergenerational issues remain important.
Aspects
Oil traders in New York don't often get a chance at world-wide fame. But for Richard Arens a one-man band in the world of oil brokerage it came at the beginning of this year. On the first Wednesday in ... Read moreOil traders in New York don't often get a chance at world-wide fame. But for Richard Arens, a one-man band in the world of oil brokerage, it came at the beginning of this year. On the first Wednesday in January, financiers and governments across the globe watched anxiously as the price of oil edged towards the historic $100-a-barrel mark. Arens saw his opportunity and seized it.
CFA Institute formed the CFA Centre for Financial Market Integrity (the "CFA Centre") to explicitly support the CFA Institute mission to lead the investment industry in setting the highest standards of ... Read moreCFA Institute formed the CFA Centre for Financial Market Integrity (the "CFA Centre") to explicitly support the CFA Institute mission to lead the investment industry in setting the highest standards of ethics and professional conduct. Asset managers in particular hold a unique place of trust in the lives of millions of investors. Investment professionals and firms who undertake and perform their responsibilities with honesty and integrity are critical to maintaining investors' trust and confidence and upholding the client covenant of trust, loyalty, prudence, and care. CFA Institute and its members are committed to reinforcing those principles. To foster this culture of ethics and professionalism, the CFA Centre offers this voluntary code of conduct. It is designed to be broadly adopted within the industry as a template and guidepost for investors seeking managers that adhere to sound ethical practice.
AXA Rosenberg has a 23 year history of valuing large universes of stocks using a fundamental approach and constructing portfolios using quantitative techniques. In this article we set aside the role of ... Read moreAXA Rosenberg has a 23 year history of valuing large universes of stocks using a fundamental approach and constructing portfolios using quantitative techniques. In this article, we set aside the role of active management in adding value above the market return and focus instead on the attraction of the global equity asset class as a whole for investors, particularly relative to long-dated bonds.
Active portfolio management is the art of balancing risk and return. In the absence of arbitrage or inside information an active manager must take on risk in order to achieve an excess return that compensates ... Read moreActive portfolio management is the art of balancing risk and return. In the absence of arbitrage, or inside information, an active manager must take on risk in order to achieve an excess return that compensates clients for the fees charged. The term "balance" insinuates that half of the art of portfolio construction lies in stock selection and the other half in risk management. It is therefore interesting to consider how one-sided the majority of fund management efforts are with regards the mix between research and portfolio construction. Despite recent trends to incorporate deeper risk understanding in the management of portfolios, the degree to which risk is actually viewed all too frequently comes down to little more than compliance adherence and tracking error recognition. In this paper we aim to demonstrate that this approach to portfolio risk management is a far from optimal as reliance upon tracking error as the primary, or worse, sole risk metric is subject to two key problems.
Most in the financial industry will recall the impact that the tech bubble had on the share market during the late nineties. Jeremy Siegel (2006) makes the point that in early May 2006 the price weighted ... Read moreMost in the financial industry will recall the impact that the tech bubble had on the share market during the late nineties. Jeremy Siegel (2006) makes the point that in early May 2006 the price weighted Dow Jones Industrial Average index approached its all time high. Yet large cap weighted indexes - such as the S&P 500 or the Russell 3000 - in which most investors hold their indexed investments were still substantially below their peaks of March 2000. Siegel questions, "Whether there is a better way to capture the market's return without enduring the wild swings that characterised the last bubble." He then goes on to state that "we are on the verge of a revolution: new research demonstrates that it is possible to construct broad-based indexes offering investors better returns and lower volatility than capitalisation-weighted indexes."
Perspectives
In this review of carbon futures pricing we review some of the results published recently by Milunovich and Joyeux (2007) who investigate the extent of market efficiency and other related issues in the ... Read moreIn this review of carbon futures pricing we review some of the results published recently by Milunovich and Joyeux (2007) who investigate the extent of market efficiency, and other related issues, in the European Union carbon futures market. Preliminary results indicate that none of the three carbon futures contracts examined are priced according to the cost-of-carry model, although two of the three contracts formed stable long-run links with the carbon spot price and interest rates. Our findings raise the possibility of profitable arbitrage opportunities in this US$24 billion market as well as the existence of effective risk mitigation instruments.
In addition to an extensive global literature examining so-called market anomalies there is a sizable body of empirical work documenting Australian stock market anomalies. This paper reviews the existing ... Read moreIn addition to an extensive global literature examining so-called market anomalies, there is a sizable body of empirical work documenting Australian stock market anomalies. This paper reviews the existing evidence relating to the small-firm and seasonality effects in Australian equities. We then empirically re-examine these anomalies using a contemporary dataset. As such, the empirical analysis represents the most up-to-date results on these Australian market anomalies and serves as a reference point for comparisons, verifications and extensions in future work into the these anomalies.
Aspects
Most performance surveys for Australian sector funds are presented in gross terms before fees and particularly before tax. But both fees and taxes are important for most investors in Australia. In this ... Read moreMost performance surveys for Australian sector funds are presented in gross terms before fees and particularly before tax. But both fees and taxes are important for most investors in Australia. In this paper we estimate the impact of taxes for various classes of investors and at various turnover levels using historical performance of the All Ordinaries Index over the past 10 years to 30 June 2006. We vary turnover levels to get an idea of the sensitivity of after tax returns to different styles of active management, assuming turnover is a key differentiating feature. Not surprisingly we find that the impact of taxation depends on the tax status of the investor, with high tax paying investors needing to pay particular attention to the tax efficiency/turnover of their active equity strategies.
After throwing off the shackles of Soviet domination former Warsaw Pact nations are now undergoing modernisation and embracing private investment to meet the demands of the modern global economy. Economic ... Read moreAfter throwing off the shackles of Soviet domination, former Warsaw Pact nations are now undergoing modernisation and embracing private investment to meet the demands of the modern global economy. Economic growth in Central Eastern Europe (CEE) is expected to significantly exceed that of the older EU member states in the coming years. As a consequence, many analysts rank the CEE after China for predicted stock market growth in 2007. Reflecting this we find investments in the stock exchanges of Estonia, Latvia, Lithuania, Russia, Poland, Czech Republic, Croatia and Hungary, very attractive. Illustrating this, the successful implementation of reform and policy change has contributed significantly to the emergence of the CEE as an opportune investment environment.
Most outcomes in life are impacted by skill (or a lack of it) as well as noise (random chance or luck). What do we mean by this in practice? We mean that a portion of any outcome is likely to relate to ... Read moreMost outcomes in life are impacted by skill (or a lack of it) as well as noise (random chance or luck). What do we mean by this in practice? We mean that a portion of any outcome is likely to relate to the process that was put in place to produce it whilst another portion is likely to relate to random factors, or noise. In turn this means that if a particular event is heavily impacted by noise then the associated outcome may not be consistent with the process that was put in place to produce it. More simply, a bad result may arise even if the process behind it was actually quite sound.
Conventional wisdom suggests that attempting to add value through the active management of currencies is doomed to failure due to the efficiency of the currency market. However this assumption is not ... Read moreConventional wisdom suggests that attempting to add value through the active management of currencies is doomed to failure due to the efficiency of the currency market. However, this assumption is not entirely correct because the currency market is large, multi-segmented and made up of participants with diverse objectives. Active currency management is also not a zero-sum game because the different parties transacting in the currency market, such as central banks and corporate hedgers, have different objectives, thus these parties can take opposite sides of a trade and still "win." In addition, the majority of currency market participants are not attempting to profit explicitly from their transactions.
The 20th century British economist John Maynard Keynes has said "Markets can be wrong for longer than you can be solvent." This sentiment resonates very well with investors who have faced the highs and ... Read moreThe 20th century British economist John Maynard Keynes has said "Markets can be wrong for longer than you can be solvent." This sentiment resonates very well with investors who have faced the highs and lows of stock markets across the world. But let's start at the beginning and look at people who manage money professionally. What are the skills that a fund manager is expected to have? Fund management is generally perceived as an art form where talent is beyond analysis and where the connection between skill and alpha is vague to say the least. Yet we know from the work that we do with some of the leading fund managers and their clients that skills can be identified and are capable of objective analysis. So what are these skills and what use is it to know whether you possess them?
The property trust sector continues to perform strongly with total return (share price plus distributions) in line with the market. This is remarkable following from the strong returns generated over ... Read moreThe property trust sector continues to perform strongly, with total return (share price plus distributions) in line with the market. This is remarkable following from the strong returns generated over the past few years. We have shown the relative performance on an accumulation basis, including distributions but not the franking benefits) for the property trust sector. We recommend concentrating on the retail, industrial and diversified sectors in the longer term, with select exposure to Sydney Office trusts for a short term trade opportunity. Exposure to select residential and apartment construction remains a medium risk strategy but with higher expected rewards. We also expect above average returns by following those management teams with strong growth profiles, and with developing funds management strategies. Some exposures that could be negative ahead include high gearing, the US dollar and US retail spending.
Perspectives
This paper indentifies the key drivers of international financial integration (IFI) by examining the importance of secondary education enrolment levels lagged GDP per capita economic growth inflation ... Read moreThis paper indentifies the key drivers of international financial integration (IFI) by examining the importance of secondary education enrolment levels, lagged GDP per capita, economic growth, inflation, a country risk index, trade openness, and capital market, financial system and tax policy indicators. This study considers a set of country characteristics that may influence the level of IFI. While the data is sourced from the IMF and the World Bank, differences between countries are addressed by assorted econometric techniques such as a Two Stage Least Squares and Generalized Method of Moments(GMM) Panel Estimators for the dynamic panel data involved in this study. The results show an increase in the degree of international financial integration over the last two decades and richer, well educated countries are more internationally integrated. There was an unambiguous negative relationship between inflation and IFI, but a fragile relationship between tax policy and IFI. The authors discuss international financial integration and its dependance upon domestic credit and economic growth, international trade openness and IMF capital control policy. The paper has significant policy implications for developing countries and provides an insight into the process of financial and monetary integration.
Behavioral Finance research growth over the last decade has spawned many new approaches to looking at old problems not adequately addressed by traditional modern portfolio theory. This paper discusses ... Read moreBehavioral Finance research growth over the last decade has spawned many new approaches to looking at old problems not adequately addressed by traditional modern portfolio theory. This paper discusses appropriate time horizons to consider in portfolio optimization while noting investor indifference to time and indeterminate cash flows. The author introduces his previous research showing that investor utility did not vary as a function of time horizons between a year and ten. It was found that perceptions about time horizons beyond a year are not analysed by investment product consumers. In his seminal book, Chaos and Order in the Financial Markets, Edgar Peters found that a more appropriate power for such a decay function was one of 0.44. For this paper a hyperbolic discounting of time is assumed where a limit exists at some particular value. The author concludes that inflows and outflows need to be assessed and that the time horizon of a portfolio with large positive flows may in fact be decades. One implication is that risk budgeting could occur as a function of where in a product cycle we are as well as the cashflows that are occurring.
With the Future Fund (FF) targeted to reach $140 billion by 2020 discussions abound regarding its evolving design and implications for the Australian economy and investment markets. The FF has $18 billion ... Read moreWith the Future Fund (FF) targeted to reach $140 billion by 2020, discussions abound regarding its evolving design and implications for the Australian economy and investment markets. The FF has $18 billion deposited with the Reserve Bank and received an additional $15 billion cash from Telstra 3, plus a 17 per cent shareholding in T3. With this year's budget surplus, nearly $50 billion is expected to flow into the financial markets, seeing the fund about five years ahead of schedule by 2009. The size of the fund's operations implies significant market impacts apt to cause problems for the administrators. When taking directions the FF will likely be front-run by market participants, negatively impacting performance. Trading in large deals has a market effect that has been estimated at doubling the price impact for a ten-fold increase in trade size. The author presents a case for Future Funds investing in imprecise portfolios and how large funds based upon the principals of a Fundamental Imprecise Portfolio(FIP) can reduce market volatility during introductory as well as growth phases.
Aspects
This paper outlines some thoughts on portfolio construction where investors have asymmetric risk tolerance with steeper downside risk intolerance. This paper presents the implications of this understanding ... Read moreThis paper outlines some thoughts on portfolio construction where investors have asymmetric risk tolerance, with steeper downside risk intolerance. This paper presents the implications of this understanding on indifference curves by mapping Kahneman and Tversky's 'Value" function as a set of 'value indifference curves,' and identifies an implication that portfolio optimization may consider downside insurance. The paper goes on to discuss the appropriate time horizon of the portfolio given investor indifference to time, and given indeterminate cash flows. Finally the paper outlines the process of risk budgeting and again poses the question as to whether portfolio optimization must consider asymmetric investor risk tolerance. The author's refer to recent studies comparing fundamental benchmarks with market-capitalization weighted ones and discuss their own efforts at fundamental indexation. These have returned in excess of conventional indices and that since October 2004 a global fundamental index has bettered the MSCI World index by 4 per cent per annum and a Global Active Value measure has done better by about 6 per cent per annum.
This paper addresses the issue of the long-term profitability of companies that have their investments in the form of physical assets which more easily allow competition to arise and erode the returns ... Read moreThis paper addresses the issue of the long-term profitability of companies that have their investments in the form of physical assets, which more easily allow competition to arise and erode the returns on capital, versus those companies whose investments are essentially intangible such as brand names, patents, copyrights and distribution networks. The authors examine the relationship between capital intensity and stock returns for over 2,200 listed companies in North America and Europe starting in 1984. The analysis which is broken up into subperiods of 3, 5, 10 and 18 year periods shows that companies with lower capital intensities have generated better returns. Further, in all time periods analysed, the two lowest capital expenditure/sales quintiles significantly outperform the two most capital-intensive quintiles. The conclusion is that there is merit in choosing active managers that assess capital intensity as well as franchise analysis and valuation into the stock selection process.
Listed Property Trusts have been traded in Australia since the 1970s and the sector is now worth more than $90 billion. The expanding range of investment alternatives offers new opportunities and challenges ... Read moreListed Property Trusts have been traded in Australia since the 1970s and the sector is now worth more than $90 billion. The expanding range of investment alternatives offers new opportunities and challenges to real estate investors and managers. Based on the authors' reading of domestic and international trends, the public debt market in Australia will expand significantly over the next few years. The four-quadrant investment model provides a coherent platform to construct and manager portfolios across all real estate related financial markets: public and private, debt and equity. The point of the discussion is that a new generation of securitized products is now able to satisfy joint investment objectives on sustained yield, capital growth and risk reduction. In Australia the increased market size and liquidity are now allowing new ways of securitizing traditional real estate financial instruments. The four quadrant model links a fuller range of financial instruments to underlying real estate assets and by adopting the a cash flow focused approach, the four quadrant model is more closely aligned with an economic as opposed to an accounting valuation model.
This paper investigates the relative merits of fund of hedge funds and multi-strategy approaches and their implications for cost -effectiveness and portfolio optimality. The authors present evidence documenting ... Read moreThis paper investigates the relative merits of fund of hedge funds and multi-strategy approaches and their implications for cost -effectiveness and portfolio optimality. The authors present evidence documenting unambiguous fee savings generated by a multi-strategy solution. The study also examines the pros and cons of investing in fund of hedge funds vehicles as well as multi-strategy approaches in terms of their cost effectiveness and the implications for optimum portfolio construction. For those personal investors and fund managers without the necessary expertise to undertake the due diligence required, the fund of fund option is popular and these investment vehicles now control about a half of hedge fund assets and two-thirds of current flows. Multistrategy funds have a disadvantage in that no multi-strategy vehicle can claim the better managers within each hedge fund investment style whereas fund of fund operations may examine hundreds of managers to identify the more talented ones. However, while fund of fund operations charge fees by strategy, the multi-strategy fund usually links them to aggregate portfolio returns.
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