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Asset Allocation & Risk Management in a Highly Volatile and Uncertain World. FELIX STEPHEN Head of Strategy & Research ADVANCE Asset Management Limited Aug 2013. THE FUTURE.
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Asset Allocation & Risk Management in a Highly Volatile and Uncertain World FELIX STEPHEN Head of Strategy & Research ADVANCE Asset Management Limited Aug 2013
THE FUTURE.... You can't connect the dots looking forward; you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something - your gut, destiny, life, karma, whatever. This approach has never let me down, and it has made all the difference in my life. Steve Jobs (Co Founder, Chairman and CEO Apple Inc, Pixar, NeXT Inc) (24th Feb 1955 – 5th Oct 2011)
Uncertainty, Predictability & Time Source: Dr Tim Jones & Advance Asset Management
What are the factors that drive the future investment environment? • Policy – monetary, fiscal and regulatory changes • Demographic – population, wealth trends, demands • Geopolitical – conflicts, relationships • Psychological – emotion, behaviour, sentiment • Necessity – meeting risk/return objectives • Valuation – are assets cheap or expensive? • Cycle - at what point are we in the financial market • and/or business cycle?
What drives people to make an investment decision? Risk / Return Fear / Greed
Investor decisions are influenced by information and emotion Risk Appetite Euphoria Panic Greed drives decision making Fundamental research drives decision making Fear drives decision making
Stock markets usually peak well before the peak of a business cycle because investors discount future news into the present value of assets.. Source: StockCharts.com & Advance Asset Management
S&P 500 Futures Positioning Equity sentiment indicator (period ended 23rd July 2013) Source: Lipper, Goldman Sachs & Advance Asset Management
Ponzi Finance.... Source: NYSE, Bloomberg & Advance Asset Management
Ponzi Finance.... • “Over a protracted period of good times, capitalist economies tend to move from a financial structure dominated by hedge finance units to a structure in which there is a large weight to units engaged in speculative and Ponzi Finance...The greater the weight of speculative and Ponzi Finance, the smaller the overall margins of safety in the economy and the greater the fragility of the financial structure” • Hyman Minsky – Macroeconomics • (university of Chicago and Harvard) • (23rd September 1919 - 24th October 1996)
Strategic, Dynamic & Tactical Asset Allocation • Strategic Asset Allocation (SAA) is designed to meet long term strategic return objectives taking into account the relevant risk level and investment time frame • SAA is the foundation for your objectives & risk tolerance • Dynamic Asset Allocation (DAA) is designed to tilt an investment portfolio depending on the medium term trends while taking into account the strategic return objectives, the relevant risk level and investment time frame • DAA is more medium term in nature and is designed to capture key financial market themes that exist within market cycles • Tactical Asset Allocation (TAA) can be used to tilt an investment portfolio depending on the current environment. • TAA is more short term in nature and is designed to better manage shorter term market volatility and opportunities
Types of Risks • Unanticipated spikes in volatility and strongly correlated markets • Tracking Error & Peer performance risks • Liquidity risk & Drawdown risks • Concentration risks • Manager risks • Country risks • Credit risk • Currency risk • Default and Bankruptcy risk • Counterparty risk • Legislative and Policy risk
Dynamic and Tactical Asset Allocation Strategies & Currency Risk Management • Dynamic Asset Allocation (DAA) can be used for implementing view’s based on more short to medium term thematic’s around market environment • Tactical Asset Allocation (TAA) can be used to take advantage of ultra- short term technical and flow driven opportunities. • Currency Risk Management (CRM) can be used to manage Currency drawdown risks and/or capital erosion due to base currency depreciation/appreciation.
THE FUTURE.... “ In a time of drastic change, it is the learners who inherit the future. The learned usually find themselves equipped to live in a world that NO LONGER EXISTS”Eric Hoffer(American Social Writer & Philosopher) 25th July 1902 – 21st May 1983
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