Post on 14-May-2017
Global Tactical Asset Allocation: A historical perspective on the current macro
environment and investment disciplines November 2012
Brian D. Singer, CFA, Partner Head of Dynamic Allocation Strategies
This material is provided for general information purposes only and is not intended as investment advice or a recommendation to buy or sell any particular security. Any discussion of particular topics is not meant to be comprehensive and may be subject to change. Data shown does not represent the performance or characteristics of any William Blair product or strategy. Any investment or strategy mentioned herein may not be suitable for every investor. Factual information has been taken from sources believed to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Past performance is not indicative of future results. Information and opinions expressed are those of the presenter and may not reMlect the opinions of other investment teams within William Blair & Company, L.L.C.’s Investment Management division. Information is current as of the date appearing in this material only and subject to change without notice.
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STEP 2 Where do Prices
Differ from Values?
Investment Analysis Framework
A framework re+ined through 30 years of experience
STEP 1 Identify Fundamental
Values
STEP 3 Why do Prices Differ
from Values?
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10
100
1000
10000
100000
1900 1920 1940 1960 1980 2000 2020
Great Moderation
Great InMlation
Great Depression
Real GDP
InAlation
Real S&P 500
+10%
-‐10%
?
The Modern Era
Past performance is not indicative of future results.
Relative Growth of S&P 500 (inAlation adjusted)
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Asset Class Fundamental Value & Price Discrepancies Key output of investment process: Expected return (8-‐year horizon, annualized)
As of 9/30/2012. Source: William Blair, Investment Expectations. S&P, MSCI, Barclays Capital, Bank of America Merrill Lynch, JP Morgan, 6 month LIBOR. Expected return information is intended to illustrate potential expectations for various capital markets and should not be considered representation of past or expected future returns for any William Blair investment strategy or product. Expected returns are provided are for informational purposes only and not intended to be reMlective of results a person should expect to achieve. Actual results will vary and may be higher or lower than the values indicated. Differences between expected and actual results may be exaggerated in volatile market environments. There is no guarantee that expected return indicated will equal the actual return for any capital market. The expected return of an asset reMlects the average probability distribution of possible returns and is based on the convergence of price to value (over an 8-‐year period for equities and 5-‐year period for bonds) plus income accruing to an investor.
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Disciplines to Frame New World Order
Geopolitical
Analysis
Macroeconomics
Game Theory/Strategic Decision
Theory
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What Game Theory Predicts for the Future
Pre-Cold War (1900 – ~1950)
• Multi-‐player
• Players evolve
• Incomplete information
• Mistakes more probable, less costly
• Unstable
Cold War (~1950 – 1980s)
• 2 Players: U.S. & U.S.S.R.
• Mutually Assured Destruction (MAD)
• Mistakes improbable, with huge cost • Stable
Post-Cold War (1990s – Present)
• Multi-‐player
• Players evolve
• Incomplete information
• Mistakes more probable, less costly
• Unstable
New World Power Order
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Superiority Requires Risk-‐Taking
Conventional Behavior
Unconventional Behavior
Favorable Outcomes Average results that may cover fees
Above average results
Unfavorable Outcomes Average results that don’t cover fees
Below average results
Be unconventional!
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Multi-‐Asset Approaches
Investment Style
Active
Passive
Allocation Style
Asset Based Risk Based
Dynamic Risk Capital
Allocation
Global Tactical Asset
Allocation
Risk Parity or “Risk Balanced”
“Classic” Static Balanced
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Conclusions
Fundamental analysis is necessary, but no longer sufAicient for superior performance
Superiority requires being unconventional
Accept randomness & mistakes
Dynamic Risk Capital Allocation:
Challenges of the future • Geopolitics will involve many leadership “games” with mistakes likely • Insolvency, bloated central bank balance sheets and weak leaders => high & volatile inMlation • Geopolitical and economic instability => turbulent asset & currency markets • Constitutional, parliamentary & direct democracies will be tested => leadership foresight rewarded
Does overwhelming turbulence and uncertainty preclude resource allocation? • Perhaps there is nothing new under the sun => a world like the Mirst half of 1900s • There is a difference between investing in companies and sovereigns => equities are attractively priced • Connectedness & integration of untapped populations and economies affords potential • With free exchange, markets are hard to suppress
“None of this is meant to be easy. Anyone who thinks it’s easy is stupid.” -‐ Charlie Munger