Tag Archives: diversification

Visualizing Factor Exposures

Measuring the away-from-benchmark exposures of active portfolios (or “smart beta” indices) is not inherently complicated.  To what degree, for example, is a portfolio cheaper than its benchmark, or more tilted toward high quality stocks?  Practitioners typically approach the question in one of several ways: Calculating weighted average differences – e.g., the yield on my portfolio is Read more […]

Japanese Market Participants Accessing U.S. Treasuries (Part 2)

Japanese market participants looking to access U.S. Treasury bonds or any other international bond market may need to be aware of fixed income risk and currency volatility.  Depending on their investment view, Japanese market participants may choose to hedge currency risk or remain unhedged. Either way, market participants may be exposed to additional returns or Read more […]

Japanese Market Participants Accessing U.S. Treasuries (Part 1)

Since the negative interest rate policy was announced by the Bank of Japan, the yield of the S&P Japan Sovereign Bond Index has tightened 33 bps to -0.07%, as of Aug. 23, 2016.  As the quantitative and qualitative easing program continues, some Japanese market participants seek investments that diversify their portfolios.  U.S. treasury bonds have Read more […]

The Consequences of Concentration: 5 – Genuine Skill?

Should active managers shift away from well-diversified portfolios and concentrate only on “high conviction” holdings in hope of generating higher returns?  We have suggested four consequences — higher risk, greater dominance of luck over skill, higher costs, and fewer outperforming funds — that are likely and logical outcomes of higher concentration.  All four apply even for active Read more […]

The Consequences of Concentration: 4 – More Underperformers

Can active managers improve performance by moving from relatively diversified to relatively concentrated portfolios?  Doing so is likely to increase risk, shift the relative importance of luck and skill, and raise trading costs.  A fourth consequence is that the probability of active underperformance is likely to increase. A simple example provides some insight.  Imagine a market with five Read more […]

The Consequences of Concentration: 3 – Higher Costs

Some active managers argue that the remedy for widespread active underperformance is more aggressive, more concentrated portfolios.  If this is the correct prescription, it has a number of adverse side effects — for example, risk is likely to increase, and the relative importance of skill and luck in decision making is likely to shift in luck’s favor. A Read more […]

The Consequences of Concentration: 2 – Luck Ascendant

Is the remedy for active managers’ well-known performance difficulties to become more active? Some observers think so, and argue that less diversified, more concentrated portfolios should be the wave of active management’s future.  But there are a number of adverse consequences to concentration — for example, risk is likely to increase.   A second consequence is that in manager Read more […]

The Consequences of Concentration: 1 – More Risk

Most active managers fail most of the time, at least if we regard their underperformance of passive benchmarks as indicative of failure.   This fact is so well known and widely documented that even staunch advocates of active management acknowledge it. What remains in dispute is what should be done to improve performance.  Some argue that active Read more […]

S&P U.S. High Quality Preferred Stock Index: A Venn of an Index

Similar to the Venn diagram in which the overlapping section of circles is the focus, the S&P U.S. High Quality Preferred Stock Index is designed to measure preferred securities that are constituents of both the fixed-rate and investment-grade preferred stock indices. Exhibit 1: S&P U.S. Preferred Stock Indices Hierarchy The weight of cumulative preferred stocks Read more […]

Why This New Way To Invest In Oil In Hong Kong Matters

Now, there has been a long bull market where stocks have outperformed commodities for eight consecutive years, ending in 2015. It’s a record. If markets behaved just as they have in the past, then some investors might say it’s time to switch asset classes. However, the high correlation between risky assets experienced recently like during the Read more […]