Strategic Investment for Long-term Asset Managers

Course Overview Since 2008 capital markets have experienced higher degrees of cross sectional asset return correlations which renders traditional diversification techniques obsolete. With many of the major economies having adopted virtually zero short term rates and, as a result of quantitative easing (QE) programs, creating a “distorted” valuation of longer term fixed income instruments, the risks for an asset manager investing in bonds with high duration can be significant. Duration risk is especially acute for pension funds, sovereign wealth funds, and endowments where the outlook for interest rates is highly uncertain and risk prone. This course is designed to address the many challenges faced by asset managers investing strategically for the long term, focusing on discerning long term macro-economic trends, examining mainstream and alternative theoretical frameworks and modelling tools, and probing how valuable such tools might be in the post GFC financial environment. It will provide unique ideas regarding diversification and financial shock absorption. There will be comprehensive discussion of macro-economic drivers which are impacting markets now and also an examination of new factors which are likely to become more important in the future. Key Learning Balance sheet duration gap analysis The impact of Basel III on banking and also the outlook for further restrictions Novel ideas regarding diversification and financial shock absorption Macro-economic drivers now and in the future Possible changes regarding currency and finance policies of key countries and markets Issues related to the future role of the renminbi and the opening up of China’s capital markets Inter-generational issues, especially related to growing public debt and adverse demographics in many advanced economies Methodology This course combines lectures and exercises and analytics using quantitative information. Who Should Attend This course will be useful for anyone working in asset management, in particular those with a specific focus on asset allocation with a long term horizon including: Sovereign wealth funds Pension funds Foundations Endowments Insurers Wealth managers Private bankers Family offices Supporting publication:
Day 1 Long term asset allocation: Overview Types of client and suitability of different asset characteristics Review of challenges Holding period issues ALM models for different types of clients Liability driven investors vs. Non-liability driven investors Profiling the investment objectives, liquidity requirements, risk/reward characteristics Case study: Global imbalances – Deficit economies of the West and the surplus economies of Asia and Middle East – Savings glut and distortion to global interest rates Macro-economic and geopolitical factors Macro landscape Demographic factors Data sources Geo-political events Activities of supra-national bodies Monetary policies of US, EU and China Protectionism, monetary policy and “fixed exchange rates” Role of new emerging market (EM) economies, minor currencies Demand for, and scarcity of, commodities Societal and political disruptions The outlook for the Eurozone Value and limitations of macroeconomic theory Overview and evaluation Trend analysis and forecasting Modern Monetary Theory (MMT) Contrasting explanations of events Is there a pattern of increasingly extended economic recoveries? Recognition of extraordinary conditions Limitations Case study: The footprint of the world’s second largest economy – Chinese consumption of commodities and impact on resource economies – PBOC role in debt/FX markets and internationalization of the renminbi (RMB) Governments, regulations and taxation Macro-prudential initiatives Government policies Political action groups and commercial lobbying Surveillance of financial services Capital adequacy, Basel III, role of banking supervisors International tax planning Confiscation, nationalization Capital controls Retrospective amendments to taxation Inheritance and estate planning Regulation of fund management Day 2 Fundamentals, valuations and analytical ratios Discounted cash flow (DCF) analysis Bond portfolios and re-investment risk Financial statement analysis Key classes of financial ratios Key investor ratios Case study: Classification of markets – FTSE Group classification system for capital markets – Developed, Advanced Emerging, Secondary Emerging or Frontier categories Emerging markets/Frontier markets Geographical opportunities Merits/demerits of infrastructure funds Analysis of ROE on resource exploration and development Demand/supply of commodities Demographics Local and global GDP growth projections from frontier markets Strategic investments Business cycles – short term and long term Business cycles, investment flows Role of “animal spirits” Bubbles and busts Globalization and de-coupling Examination of asset returns Global imbalances A cyclical approach to investment Case study: Is business cycle still valid? – Relationship between consumer staples and the consumer – Discretionary sectors, early/ late cyclical sectors, industrial, financials Ethics and inter-generational issues Resources and assets do not ‘belong’ to any generation Conservation for future generations External costs - Transfers of financial liabilities to public sector Trade off between growth and resource depletion/environmental degradation Sustainable growth Socially responsible investing Corporate governance Dynastic/family businesses Public balance sheet issues Day 3 The new focus on risk on/risk off (RORO) strategies The risk on/risk off paradigm Heightened correlations for cross sectional asset returns Market liquidity concerns Dynamic hedging strategies Statistical arbitrage strategies Challenges of RORO to Modern Portfolio Theory (MPT) and Markowitz Eurozone risk China bubble risk Inter-market correlation strategies executed by algorithms Flash Crash of May 2010 High frequency and algorithmic trading Case study: Is alpha dead? – With individual equity dispersions at historically low levels it is hard for fund managers to gain an edge by seeking out alpha. – “All 500 S&P companies have the same chairman and his name is Ben Bernanke” The future of the USD as global reserve currency Criticisms Quantitative easing IMF and Special Drawing Rights Fiat currency vs. Commodity based monetary standard Does the PBOC controls global FX markets? Increasing use of swaps between EM states Shadow FX operations - interventions Risk metrics and risk management Fundamentals of VaR Portfolio drawdown Statistical tools Risk/reward concepts Is VaR reliable? Limitations of normal distribution Hedging techniques Use of swaps and other derivatives Implied volatility derived from options, CBOE Volatility Index (VIX) Clustering of volatility episodes in market behaviour Case study: Unconventional monetary policies – Policies of Federal Reserve, ECB, BOE, BOJ and PBOC – QE, Operation Twist, LTRO, OMT, capital controls – Risks/benefits, unintended consequences Technical analysis with a long term perspective Charting long term trends, support/ resistance levels Long term correlations amongst asset classes Cyclical behaviour of asset returns Discerning long term technical divergences/dissonance patterns Market inflection points Elliott Wave Theory Chart patterns revealing examples of technical divergences and dissonance Quantitative and statistical tools Day 4 Systemic liquidity issues Risks from structured finance Left tail dependencies Financial system too tightly coupled with “too big to fail” nodes Originate/Distribute risk model weakness Bank failure risk Eurozone risk China bubble risk Confidence in financial integrity Merits and difficulties of tail risk insurance products Case study: Financial contagion – Discussion on the disappearance of system liquidity when movements between multiple asset classes become too highly correlated Venture investments and technological change Value of intellectual property Open source - Proprietary standards Evaluating new ventures/startups Should venture investments be held for the long term? Innovation, disruption and technological obsolescence Changes in mobile technology platforms Trends in alternative energy investments Future of broadcast media, social networking, entertainment Bio-medical research and consequences for longevity, health care Technological change in financial services Managing portfolios for the long term Investment horizon, likelihood of redemptions etc. Relevant asset price volatility, currency, fluctuating interest rates Counterparty risk in OTC Benefits/limitations of diversification Active and passive strategies Hedging and immunization Leverage risks Illiquidity risk Shadow banking system Survivorship bias Length of track record of fund and drawdown analysis Key man risk issues Case study: Sovereign default risk Future challenges Human capital and knowledge economy Intellectual resources Where are the jobs of the future? How will the world resolve the problems of too much debt? Public and private debt Risks to debt holders Income and wealth inequality Risks of political and social unrest Climate change and resource depletion Expectations regarding future returns to capital investment