As US small-cap valuations have grown increasingly extreme, so has our conviction in underweighting them Small caps have benefited from the recovery in US economic conditions since 2009 and the perceived safe-haven status of domestic US assets. Investors have earned low single-digit nominal returns from historical valuation levels equivalent to those today, an unappetizing prospect…
The big drop in US Treasury yields this year has once again confounded the consensus. Benchmark ten-year Treasury yields have declined from 3% to around 2.5% in under five months. Investors that took duration risk were handsomely rewarded, as 30-year long bonds have returned 12.2% year-to-date through May 23, the best performance over this period…
On May 6, Chinese e-commerce giant Alibaba filed a registration statement in the United States, its first official step toward becoming a public company. In addition to its size and nationality, Alibaba’s plan to list under a dual-class voting structure is noteworthy. Multi-class share voting structures are frequently criticized for exacerbating the agency problem created…
Today’s estimated global overhang is $909 billion net of fees, with US private equity, European private equity, and real estate the primary contributors. With capital appearing to be deployed at a slower pace than historically, the overhang is larger than expected. Too much overhang and the pressure to put capital to work before it expires…
Parts of China’s “shadow banking system”—broadly defined as the non-bank credit and funding markets—have some troubling similarities to US securitization markets circa 2007–08. Specifically, the “guaranteed returns” and off–balance sheet nature of certain products—as well as a “borrow short and lend long” asset-liability mismatch—are worrisome features, particularly considering that the area, which barely existed in…
Our views across equity markets have not changed given a quiet start to the year for both developed and emerging markets stocks. Given stretched valuations in markets like the United States it may take considerably better earnings and macro data to push stocks higher, while in comparison European earnings have been more lackluster (and growth…
Executive Summary To construct an effective liability hedging portfolio, a key first step is to evaluate the variety of ways liabilities can be calculated and discounted and to identify the most relevant liability metric for a plan sponsor’s circumstances. Plan sponsors should also define the acceptable level of surplus risk and carefully consider the appropriate…
Executive Summary Risk parity comprises strategies whose goal is to define a more “efficient” mix of assets that is more diversified across the risks caused by different asset classes and economic environments, and that yields a higher Sharpe ratio than more traditional approaches. In practice, risk parity aims to achieve this by balancing the volatility…
Beginning May 30, Qatar and the United Arab Emirates (UAE), with a combined weighting totaling about one-third of the MSCI Frontier Markets 100 Index, will graduate to MSCI’s emerging markets indexes. This transition will require frontier index funds to sell down their holdings of the countries’ 22 stocks and to buy larger stakes of the…
Why do investors have real assets in their portfolios? The usual answer is to hedge against inflation. However, given recent muted inflation levels globally and the poor performance of common inflation hedges, many investors are increasingly questioning why they hold any real assets at all. In the end, we believe real assets deserve a place…