Category: White Paper

Emerging Market Debt

This paper explores EMD as an asset class, focusing on the benefits and risks. Further, EMD characteristics and their impact on portfolio dynamics are discussed. Recommendations as well as guidance toward making an allocation to the asset class are included.

Due to risks, uncertainty, and overall lack of credit quality, institutional investors have not historically included emerging market debt (“EMD”) in their portfolios. However, the investment landscaped has changed over the past few years. Driven by low interest rates and deteriorating fundamentals in the United States and other developed countries, investors’ interest in EMD has skyrocketed in recent years.

This paper explores EMD as an asset class, focusing on the benefits and risks. Further, EMD characteristics and their impact on portfolio dynamics are discussed. Recommendations, as well as guidance toward making an allocation to the asset class, are included.

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In Search of Opportunity for Active U.S. Equity Managers

This paper seeks to determine if there are areas of public equity markets that are “less efficient” and thus potentially conducive to active investing. Without taking a stance on the active versus passive debate, this paper asks, “if you plan to hire an active manager, what is the best place to start looking?”

As we highlighted in a recent newsletter (Passive Strategies Gaining in Popularity), institutional investors continue to shift their U.S. equity allocations away from actively managed strategies and into index funds. The support for this shift has been proven by academic research as well as recent investment experience. This paper does not question the validity of passive investing approaches. Accepting that it is difficult at best to beat a market that is relatively efficient, this paper nonetheless seeks to determine if there are areas of public equity markets that are “less efficient” and thus potentially conducive to active investing. Without taking a stance on the active versus passive debate, this paper asks, “if you plan to hire an active manager, what is the best place to start looking?” The following paper is broken up into multiple sections. First, the workhorse of active equity manager evaluation, Fama-French factor analysis, is introduced. Next, active managers with different size and style biases are examined to search for pockets of alpha. Finally, additional thoughts and conclusions are provided for investors.

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Global Equity Position Paper

The following paper examines global equity as an asset class, focusing on justifications and concerns for investing globally rather than via a traditional partitioned U.S. and non-U.S. approach. Furthermore, relative performance, risks, and meaningful outperformance from active management are also considered. Ultimately, this paper strives to investigate the theoretical reasons for global investing and whether these same arguments hold true in reality.

As economies and capital markets become increasingly more integrated, interest in global equity investing has soared over the past few years, making some U.S. institutional investors question the traditional partitioned approach of U.S. and non-U.S. equity allocations. Over the last ten years, allocations to global equity mandates (as a percentage of new commitments to global and international funds) have risen from 6% in 2000 to almost 40% by 2011.1 In essence, U.S. investors have increased global equity mandates as a percentage of their total equity allocations, meaning a shift from a partitioned U.S., non-U.S. approach to a global program.

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Global Bonds Position Paper

Over the last several years institutional investors have adjusted their fixed income portfolios to include significant allocations to global bonds. This trend represents a regime shift from prior years when bond portfolios were mostly concentrated on U.S. issuers. However, as the trend has gained momentum, so has the need to truly understand global bonds and how they can impact a portfolio. In this paper, we outline our position on investing in global bonds from the perspective of a U.S.-based investor.

The following paper examines global equity as an asset class, focusing on justifications and concerns for investing globally rather than via a traditional partitioned U.S. and non-U.S.
approach. Furthermore, relative performance, risks, and meaningful outperformance from active management are also considered. Ultimately, this paper strives to investigate the theoretical reasons for global investing and whether these same arguments hold true in reality.

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Portfolio Rebalancing Guide

Failure to rebalance a portfolio can lead to a much different risk and return profile than suggested by the original asset allocation. Although straightforward in concept, the topic of rebalancing is not always understood, most especially its importance in times of market stress. In this paper, we address the most common rebalancing programs utilized by investors, and investigate the advantages of each.

Regularly rebalancing portfolios is one of the key duties of trustees and other fiduciaries responsible for managing institutional portfolios. Asset allocations are set to provide a predetermined risk/reward profile that fits a fund’s objectives and constraints. Portfolios are rebalanced when they drift away from policy target in order to maintain the risk/reward profile implicit in the original asset allocation. How often should clients rebalance their portfolios? What guidelines should clients use to determine when to rebalance? What are the costs and benefits associated with rebalancing? This paper takes a rigorous look at rebalancing, and provides some guidelines for implementing a rebalancing policy.

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LDI Position Paper Part 2 (of 2)

LDI Position Paper Part 2 (of 2). Intended as a resource for plan sponsors who have decided to implement an LDI strategy, and covers the practical issues surrounding implementation and maintenance, along with risks.

Over the last five years, Liability Driven Investing (“LDI”) has grown in popularity as an investment strategy for pension plan sponsors. Our two part position paper series on LDI takes a close look at LDI strategies, with an emphasis on the “if” and “how”: deciding IF an LDI strategy is appropriate for a given pension plan, and if so, HOW it should be implemented. In Part I, we examined the motivations for LDI strategies, and which types of plans are best suited to adopt an LDI mandate. Part II is intended as a resource for plan sponsors who have decided to implement an LDI strategy, and covers the practical issues surrounding implementation and maintenance, along with risks. Ultimately, the following paper should help plan sponsors decide if an LDI strategy is appropriate for their plans.

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LDI Position Paper Part 1 (of 2)

LDI Position Paper Part 1 (of 2).  Examines the motivations for LDI strategies, and which types of plans are best suited to adopt an LDI mandate.

Over the last five years, Liability Driven Investing (“LDI”) has grown in popularity as an investment strategy for pension plan sponsors. Our two part position paper series on LDI takes a close look at LDI strategies, with an emphasis on the “if” and “how”: deciding IF an LDI strategy is appropriate for a given pension plan, and if so, HOW it should be implemented. In Part I, we examine the motivations for LDI strategies, and which types of plans are best suited to adopt an LDI mandate. We also cover a progressive series of LDI portfolios to demonstrate how they can help control funded status risk. Ultimately, the following paper should help plan sponsors decide if an LDI strategy is appropriate for their plans.

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Commodities Position Paper

Explores commodities as an investment, focusing on investment vehicles, the sources and attributes of historical risk and return, and commodities’ place in an investment portfolio.

Skyrocketing commodity prices combined with the poor performance of equities have led to an increased interest in commodity allocations. Commodities have not historically been part of an institutional investor’s asset allocation, and some even question whether commodities are an asset class.

This paper will explore commodities as an investment, focusing on investment vehicles, the sources and attributes of historical risk and return, and commodities’ place in an investment portfolio. Commodities as an investment are introduced and then the mechanics of long-only futures positions are explained. Next, the drivers of individual commodity returns and portfolios of commodity positions are examined. Finally, commodities are analyzed in the context of a balanced portfolio.

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Infrastructure Position Paper

Examines the infrastructure asset class in great detail, from its early beginnings in the 1980s to its current day role in an institutional portfolio.

Infrastructure is a relatively new asset class to institutional investors and over the last five years has emerged as a sustainable addition to client portfolios. The following paper examines the asset class in great detail, from its early beginnings in the 1980s to its current day role in an institutional portfolio. In particular, the nuances of infrastructure, as well as its unique characteristics are discussed in an effort to cultivate a thorough understanding of the asset class. Recommendations as well as guidance towards making an allocation to the asset class are also included.

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Please see our 2018 Update to this Infrastructure position paper.

High Yield Position Paper

Clarifies the myths about the asset class, and sheds light on the benefits and risks of high yield bonds.

High yield bonds are a relatively new asset class in the institutional world and consequently not always understood. The following paper seeks to clarify the myths about the asset class, as well as shed light on the benefits and risks of high yield bonds. Critical topics such as return distribution, correlation to the credit cycle, and how to access the asset class are covered. Throughout the paper, a premium is placed on establishing a thorough explanation of the asset class and why high yield bonds should be included in institutional portfolios.

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Please see our 2017 High Yield Position Paper update.