Best of 2016: A Bad Year for Armchair Investors
How will 2016 be remembered? As a vintage year for asset allocators amid some startling twists and turns in oil prices, currencies, emerging markets, central banks, bond markets, and, of course, politics.
Not really an ideal environment for any armchair investor.
Amid such turmoil, what were the most popular write-ups of presentations from 2016 CFA Institute conferences?
Four top speakers helped attendees and readers navigate the egregious market uncertainty: Tina Vandersteel, CFA, discussed the attractions of emerging market local currency debt; David-Michael Lincke, CFA, took on on the increasing hold of commodities on big investors; Joyce Chang discussed global bond market trends; and Ronald G. Layard-Liesching considered the destabilizing effects of foreign exchange (FX).
Financial adviser guru Tom Brakke, CFA, wins top billing with his restatement of an easily recognizable truth: Investor and asset-owner due diligence should focus less on past performance of individual managers and more on the defining characteristics of the organizations that employ portfolio managers.
The future of financial organizations was the subject of another well-received piece. In “The Future of Financial Planning in the Digital Age,” Michael Kitces says, “The bad news is that those who do not adopt technology to improve their value proposition to clients really will be replaced by robots.” A salutary insight indeed.
Readers also gravitated to Bethany McLean for her talk on the strange saga of Fannie Mae and Freddie Mac; a quartet of academics for “Return of the Quants: Risk-Based Investing;” and Colin Morrison for a deflation of some of the pretensions of active share in “Active Share: Key Insight or Flawed Measure?”
This year will also be remembered for the retirement of CFA Institute Conference Proceedings Quarterly, a publication whose archive features contributions from numerous financial luminaries of the past half century, including such behavioral finance pioneers as Amos Tversky and Robert Shiller; Nobel laureates Harry Markowitz, William F. Sharpe, and Robert C. Merton; index-investing pioneer John Bogle, and many others too numerous to mention.
The new Conference Collections provides a list of selected conference presentations in an easy-to-digest format that includes speaker highlights, transcripts, videos, and blog posts. The six most popular Conference Collection releases are listed below.
Top 10 Conference Proceedings Quarterly Articles of 2016
Due diligence in manager selection has become too much of a standardized documentation process. It should be an investigative discovery process. Rather than focusing on past performance of individual managers, the focus in due diligence should be on the defining characteristics of the investment management organizations where the managers work.
Emerging debt remains attractively priced, particularly local currency debt at current relative levels. Alpha opportunities, especially those approached from the bottom up, persist despite challenges created by declining liquidity.
Despite the current downswing, commodities continue to offer institutional investors meaningful benefits through diversification, inflation protection, and absolute returns. But investors should be aware of the structural flaws in commodity indexes.
Many observers believe that the policies of Fannie Mae and Freddie Mac led to the financial crisis of 2008–2009, and many would like to remove them from the US mortgage market. Although Fannie and Freddie were not blameless, their policies were less destructive than those of private lenders.
Managed volatility and covered call writing are two of the few systematic investment strategies that have been shown to perform well across a variety of empirical studies and in practice. So far, they have been studied mostly as separate strategies, but when combined, these two strategies create a powerful toolset for portfolio enhancements.
The future of financial planning in the digital age will bring good news and bad news. The rise of “fintech” — that is, financial technology — is going to improve the ways that we engage with and deliver services to clients, including investment and wealth management, and financial planning. The bad news is that those who do not adopt technology to improve their value proposition to clients really will be replaced by robots.
The implementation of financial regulations, quantitative easing (QE), changes in market structure, and a lack of liquidity are shaping today’s investment environment. Market fragmentation is greater, and market depth is declining.
The currency markets have undergone major structural changes because of dislocations caused by QE and the entrance of new market participants from hedge funds and emerging markets. Misguided over-regulation has undermined the market-making structure, which is systemically destabilizing and has created an illusion of liquidity.
Some regard active share as the “Holy Grail” of investing — that is, a sure fire way to identify tomorrow’s outperformers and avoid the dog funds. Certainly, the computational simplicity is appealing, but unwavering devotion and unwitting reliance on the measure can lead to dubious conclusions. The reality is that the calculation might be the only simple thing about active share.
To provide investors with what they truly want — absolute return — the investment industry needs to change its structure. Critical to this change will be a focus on asset allocation as opposed to security selection. Definitions of risk premiums and active strategies should be revised, and greater emphasis should be put on managing allocations to risk exposures.
Top Six Conference Collections of 2016
How we view geopolitical strategic scenarios for the future dramatically impacts our investing perspectives today. Geopolitical analyst Peter Zeihan outlines a global political framework that is in the midst of increasingly rapid change, presaging such events as Brexit and the US presidential election of Donald Trump.
What is the highly acclaimed Canadian public pension fund model, and can its methods be translated to other countries?
Keith P. Ambachtsheer, long an outspoken advocate for pension reform, shared his latest prescription for change with delegates gathered in Montréal for the 69th CFA Institute Annual Conference.
Ten years ago, we thought the world was running out of oil, that China and other emerging market countries would have insatiable energy demand growth, and that production costs would generally rise over time. Amy Myers Jaffe systematically dismantles those views.
The Financial Times columnist and associate editor has a problem with people who use the term “authentic” to describe the behaviors required to succeed in the modern workplace.
“Ideally, the number of people you can have at a dinner party, if you want to have one single conversation, is six or less,” Leah Zell, CFA, explained. Any more than six and the conversation breaks down. Zell applies this same “dinner table rule” at the investment firm she founded, Lizard Investors.
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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.
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