The Impact of Tapering on Risky Assets
The Fed has deferred tapering, but when retrenching starts, some risky assets may be more attractive than others. Jason Hsu explores how tapering will affect financial markets.
Does Blame Predict Performance?
The science of manager selection really is about what Charley Ellis calls “the loser’s game.” So how can investors improve their odds of picking successful managers? For one thing, avoid asset managers that have a culture of blame.
A Framework for Examining Asset Allocation Alpha
Despite the large body of literature on the importance of asset allocation as a primary determinant of portfolio performance, the definition of asset allocation “alpha” remains a poorly defined concept. In this article, we show that a portfolio’s total alpha can be decomposed into alpha from asset allocation and manager selection. The asset allocation alpha…
From QE to Queasy: Fiscal Policy and the Risk of Inflation
Quantitative easing enables the government to issue low-cost debt and support undisciplined spending. This spending, in turn, generates inflation, which chokes off private sector growth and transfers wealth from future taxpayers to the current generation, CIO Jason Hsu writes in this commentary.
Year-End Capital Markets Forecast
What looks best for 2013? Emerging market local currency sovereign bonds are likely to outperform developed market government debt. For equities, both developed (ex-U.S.) and emerging markets offer more attractive valuations and better dividend yields than U.S. stocks. Here’s why.
The Risk in Risk Parity: A Factor-Based Analysis of Asset-Based Risk Parity
The risks embedded in asset-based risk parity portfolios are explored using a simple, economically motivated approach. Such an approach can go a long way toward demystifying and making more explicit the drivers of performance and risks of asset-based risk parity portfolios. Investors in risk parity can use this approach for more robust portfolio construction and…
The Role of Risk in Asset Allocation
A traditional asset allocation framework allocates to various asset classes with the goal of matching important risk exposures. In reality, many asset classes share exposures to common risk factors and thus are highly correlated, particularly with equities. This article explains how investors can achieve more intuitive and perhaps more sensible portfolios with an approach based on risk factors.
Why We Don’t Rebalance
Research makes a compelling case that investors should rebalance their portfolios, yet most investors do not do so. Why not? The answer is less about “behavioral mistakes” and more about the fact that “rational” individuals care more about other things than simply maximizing investment returns.
Selling Hope
Numerous studies show that most active managers fail to deliver “alpha” over time net of fees. And yet investors continue to pay high fees for active management. This article asks why investors persist in such seemingly irrational behavior. As long as active managers can keep on charging high fees, they will do so. It is time for investors to examine how much they are willing to pay for an elusive risk premium.
Should You Be Concerned About the Government Debt
With U.S. government debt equal to 100% of GDP, should investors be concerned? What specifically makes high government debt-to-GDP bad? How much is “too much”? Does it matter whether the debtholders are domestic buyers or foreign buyers?