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Archive for November, 2013

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Posted On 28  Nov  2013  

What is Smart beta?

The accepted definition of smart beta is a “range of investment strategies that offer more than market returns, but in a systematic way”. Smart beta is thus about understanding what types of strategies can be turned into systematic processes  i.e. where can a systematic approach outperform in a consistent way and deliver higher risk adjusted returns and lower delivery costs. Equities: Value and/or Fundamental weights using all constituents or a sub set Risk reduction (minimum volatility, maximum diversification) Equal weight Liquidity based Sector duplication Alternative re-balancing mechanisms Bonds: Ratings & Liquidity weighted Balance sheet fundamentals selection criteria Credit Spread selection process FX: FX is more complex to define in the alternative beta space. No one simply keeps a long of short position in a single pair. So what is the benchmark? The commonly accepted view is that the FX-Carry stade between two pairs such as USDBRL, USDMXN, USDZAR, USDINR, USDHUF,

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Posted On 16  Nov  2013  

QE could end quietly

The last time there were signs that the Fed will taper, the emerging market currencies went into a spin and since the debate a fear about how the markets will react to QE ending has heated up. There are all kinds of suggestions about what may happen to the stock market and as always when the S&P 500 touches a new high, analysts ask if that is already too high. Most people pay scant attention to the basic workings of stock market indices. By design the market capitalization of the largest companies in the world or in any given country rises at rates that are higher than the rise in the average rise in market capitalization of the market as a whole. This is simply because the largest companies are always gobbling up the smaller ones. In comparison, very few large companies end up floating their subsidiaries. M&A activity to

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Posted On 14  Nov  2013  

Being well informed on asset allocation

James Mackintosh writing in the FT on Monday 11th, November, 2013 rightly points out that “The rise of the multinational has transformed the corporate landscape in the past half-century. Now, the inventor of the most widely used global stock market indices thinks the measurement of equity performance needs to change too – and with it the dynamics of investing.”   Capital Group – which, as Capital International, was the originator of the MSCI index range – says that the standard national, or even regional, benchmarks used by fund managers no longer measure what they set out to measure. In the FTSE 100 index less than a quarter of the revenues of companies in the Footsie come from the UK, and many of their dividends are paid in dollars or euros, according to the article. Algoam Comment: We are not clear what the original intent was to design these country indices, other

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Posted On 04  Nov  2013  

The need for an analytical approach to life and investing

Rebecca Knight’s interview with Elisabeth Paté-Cornell is insightful who “believes managers need to think like engineers and understand probability.” (FT, Nov 4, 2013) “Risk analysis is not about predicting events; it is about understanding the probability of possible scenarios, according to Elisabeth Paté-Cornell, professor at the Stanford School of Engineering. Algoam Comment: In practice, predicting and probability of possible scenarios is the same thing. “In her latest research, she argues that expressions such as “black swan” and “perfect storm”, which have become journalistic shorthand when describing catastrophes, are just excuses for poor planning. Managers, should “think like engineers” and take a systematic approach to risk analysis. They should figure out how a system works and then identify the probable ways in which it could fail.” Algoam Comment: We somewhat agree. These descriptions “black swan” or “perfect storm” are non nonsensical. Swans come in many shades as do storms. There are degrees

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Posted On 02  Nov  2013  

Tapering dangers to emerging markets

Gillian Tett asks very pertinent questions in the FT of November 1, 2013 (Money mirage poses emerging markets danger), “If a shock were to hit Brazil, India, Indonesia – or any other emerging market country – tomorrow, how would investors react? Would asset values adjust smoothly, amid an explosion of trading flows? Or would markets instead freeze up, as liquidity evaporated?   She points out that, “Earlier this year, when investors started to speculate about an American “taper” – or wind-down from quantitative easing – this conjecture was enough to spark a dramatic gyration in the value of some emerging market assets, such as Indian or Brazilian equities.” Algoam Comment: Here she should have pointed out that this caused the EM currencies to decline in relative value, which has caused,…those markets to have more than recovered. “The real problems are not to do with growth or capital inflows which could