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Perspectives Articles
Greed and Fear: Anchoring and Aversion to Ambiguity
Emotions and investor psychology can play a powerful role in driving share market returns and the sharp rebound in 2009 could see a return to ‘greed’, after two years of ‘fear’. In this paper, Robert Van Munster, head of Tyndall Equities, looks at two types of behaviour: ‘anchoring and adjustment’; and ‘aversion to ambiguity’. Both of these heuristics (or ‘rules of thumb’ often gained from trial and error) have a strong influence on investor behaviour and the choices they make and investors need to be aware of these in upturns as well as downturns, as they can lead to conservatism, disappointment and insufficient diversification. Van Munster writes that identifying and understanding these behaviours can not only assist with making more informed and rational decisions, but can also provide an edge over other investors. Many of these behaviours are, however, entrenched. Seeking independent financial advice and investing with a professional fund manager are steps investors can take to reduce the role these behaviours play in their decision-making process.
Is Alpha Just Beta Waiting to be Discovered?
Alpha is shrinking, and it’s good news for investors. This idea may seem paradoxical. But alpha is really just the portion of a portfolio’s returns that cannot be explained by exposure to common risk factors (betas). With the emergence of new betas, the unexplained portion (alpha) shrinks – alpha gets reclassified as beta. The rise of a group of risk factors we call hedge fund betas makes this transformation especially relevant today. Hedge fund betas are the common risk exposures shared by hedge fund managers pursuing similar strategies. We believe these risk factors can capture not just the fundamental insights of hedge funds, but also a meaningful portion of their returns.
Hedge fund betas are available for investment and can also be used to enhance portfolio construction and risk management. Ultimately, we believe the rise of hedge fund betas will lead not only to the reclassification of alpha, but also to better-diversified portfolios with greater transparency, improved risk control, and – perhaps most importantly – higher net returns.
Perspectives from China and the Implications for Australia
The emergence of China may be the single most important event in Australia’s economic history. In coming years, China’s influence will shape Australia’s wealth but also how and where we live. It will make us rich relative to much of the developed world but also raise social issues, particularly of fairness. As such, understanding China better through travel is crucial to determining how some of these issues may play out. For these reasons, James White travelled to China and had a closer look into its current economic environment, the impact of the large monetary and fiscal stimulus programs, the near-term outlook for growth and the nuances of Chinese commodity demand. The journey through central China, meanwhile, provided an insight into the country’s domestic economy. In particular, the city of Wuhan in central China did much to change the way White thinks of the country.
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