Successful Portfolio Investing - Fotis Trading · The nature, impact and effectiveness of...

Successful Portfolio InvestingThe looming pensions crisis, why your government might not be able to fund your

retirement and the future of portfolio and asset management. Alternative, modern

solutions to traditional, outdated approaches, for an effective and robust pension and

investment portfolio

Contents

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Introduction

How confident are you that you will get a

pension in the future?

Which factors have caused the pension crisis?

The impact in the Asset Management Industry

Future Impact and Practical Implications

Solutions! A New Adaptive Approach

Live the Life You really Want!

Successful Portfolio Investing

3Successful Portfolio Investing

Introduction

If you have been following developments in the financial markets during the last decade, you have

probably witnessed and experienced many dramatic events.

The sub-prime market collapse in the US that resulted in the crash of 2008, central banks globally taking

control in order to save the economy, big banks that were once described as “too big to fail”, even nations

in developed economies, needing a “rescue” package, otherwise it was “game over”, not only for those

with cash-flow problems but also for every each one of us. These are not developments and incidents that

left us untouched, the whole society changed and adjusted and we will continue to see changes, we

haven’t even considered, moving forward.

Just briefly, consider the potential impact from artificial

intelligence to productivity and the workforce, or the

changing demographics and the “baby-boom” generation

moving into retirement over the next years.

Are you absolutely confident that you will be able to receive

a pension in the future? Have you considered the impact

from this fast changing environment to your pension or

investment portfolio?

If you wish to find out what really happens in the world,

upcoming new key trends in finance and society, as well as,

what matters most for you and your own wealth then this is

the place to start!

In this special report, you will find out about:

- New demographic trends

- Life expectancy and how it affects your pension

- The huge liabilities gap that national governments face

- The impact in the asset management industry

- Future Trends in Portfolio Management and the real impact for you

- How to save your pension and create a solid, robust portfolio strategy

- Which strategies will perform best under this new environment

We will uncover the truth about the investment management industry and show you in an easy, step by

step, simple way, how to analyze the markets and create well-diversified investment portfolios, using

either ETFs or Stocks that have the potential to easily outperform average market returns.


How confident are you that you will

get a pension in the future?

Most likely you have heard that before. There is a big black “hole”, a huge deficit

among government pension liabilities that affects everyone globally.

Citigroup analysts said that the total value of unfunded or underfunded government

pension liabilities for twenty major OECD countries stands right now roughly at $78 trillion,

which is on average a 190% of the GDP.

There was another detailed study published by the World Economic Forum which

estimated that the retirement savings gap was standing at $70 trillion in 2015 and that

would grow by a rate of 5% annually to a massive $400 trillion by 2050.

In the chart below, by Mercer Analysis that was also published on the World’s

Economic Forum report, you can see the gap in 2015 for each different country and the

estimated gap by 2050. It is scary, isn’t it?

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National Governments making

things worse

It is an important and a clear, undisputed fact that national governments with their

unsuccessful economic policies and lack of vision have only made the matter worse and

they are hugely responsible for this mess.

Over three quarters of that $70 trillion gap in 2015 can be attributed to unfunded

or underfunded government-provided pensions and public employee pension promises,

as you can see in the chart below.

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Which factors have caused the

looming pension crisis?

It is very difficult in this environment to make accurate macro-economic predictions. This is not a

static environment with known, specific variables that might change “normally”, within certain levels,

over time. This is a chaotic, non-linear environment that changes fast, with unpredictable variables

that can change dramatically over the next few years and also swing wildly in the meantime!

Allow us to offer some factors that distort the current and future financial environment and have

also contributed significantly to the current pension crisis.

The most important factor is demographics.

Life expectancy has increased dramatically, by one year every five years for the last decades. One

baby born in 2017 could easily be expected to live to 100 years. Please take a look at the Life

expectancy chart below.


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This is great isn’t it!

Of course it is but, when pension funds were put together back in the 50s-60s, they were designed to

offer a pension to people retiring around 65-67 years old and the expectation was that they would die

around their 80’s. Nowadays, the reality is that people can retire slightly earlier, around the 60-65 year

old mark but, they are expected to live into their 90’s. So now pension funds have to pay people for more

years into retirement and actually longevity is expected to increase even more in the future.

It can get even worse especially for developed economies in the western world.

Not only people live longer and spend more years into retirement but they are not having babies as well!

It is estimated that two thirds of the world’s countries have birth rates below replacement rates. It

practically means that more and more people are expected to move into retirement in the future but they

are not being replaced, the workforce is “shrinking”.

If we leave things as they stand right now, the global dependency rate will drop from 8:1 to 4:1 in 2050. If

there are 8 workers for every one getting into retirement, it will be 4 workers for every 1 going into

retirement by 2050.

Would you like to guess what this means for pension liabilities?

You might think, if there are such issues and governments cannot manage pensions properly then why

people don’t move on and create their own private pension or have their own savings plan for their

retirement?

Some people do that but due to the financial environment of the last few years, it is actually easier said

than done.

People do not have enough income to save adequately, so they can fund their retirement. How many

people do you know that could save 10-15% of their annual salary nowadays? Imagine if you also have a

young family with children, costs keep rising but not your income!

There is also the issue that pension plans are tied more or less with the performance of financial markets.

Everything changed since the Great Financial Crisis of 2008. In order to save the global economy, central

banks, had to provide all the liquidity needed in the system but, in the process, long term intermarket

relationships and correlations were heavily distorted, causing future expected returns to change

dramatically.

Usually, large institutional investors and especially pension plans invest mostly in the fixed income

markets. But since the crisis, global bond yields have moved to all-time lows and future expected return

for government bonds are also at very low levels. This means that future liabilities for pension funds grow

higher but, expected returns are at very low levels or even going to be lower in the future.

Who will pay for this liabilities gap?



Let us take a look into the issue of asset performance and the impact on investment and pensions through a

different angle and examine this more “technically”, through portfolio theory.

I think we could safely argue that since the 1950’s up until 2008, investors have been overpaying for beta in the

markets. During this period, there were of course various negative years for investors and recessionary periods as

well but, not to such a degree that would seriously affect long term expectations. The financial system as a whole

was not at risk. Despite those negative years mutual and hedge funds of various different categories were still able

to offer decent returns

This whole investment process was based on the Modern Portfolio Theory, introduced by Harry Markowitz in

1952. In very simple language, the whole theory was based on the premise that if bonds go down, equities will go

up and vice versa. So you could build a portfolio consisting of both bonds and equities, according to your own

tolerance of risk and have positive expected returns over the longer term. You wouldn’t beat the benchmark but

you could still enjoy attractive returns and watch your money grow over a longer period of time, so you could

actually retire with a healthy well-funded portfolio.

Just like anything else in life, of course there are practical limitations and the theory has indeed a few weaknesses

but who would complain or propose a different more effective approach, in a period when the whole society was

growing together? Financial markets were moving higher in the longer term, investors were making money,

pensions were adequately funded, banks would get their fees, they would all be happy.

Here is the problem though, we cannot continue like this anymore!

Modern Portfolio Theory applications and mixed Bonds-Equities portfolios, like the widely popular 60-40, were

working great for more than 60 years but, we cannot continue managing portfolios and investing our money under

the same principles.

For example, Modern Portfolio Theory and most investment advisors when creating a portfolio, assume that asset

class returns are normally distributed and correlations as well as volatilities are static and remain constant over a

longer period of time.

Empirical evidence clearly indicate though that this is not true, especially after 2008 and under this new economic

regime.

Markets are NOT normally distributed but rather exhibit non-linear behavior, they are “chaotic” and you cannot

rely on traditional diversification tactics, during episodes of financial distress. Empirical evidence suggest that

“black swan” events appear far more frequently than Modern Portfolio Theory would suggest.

Correlations and volatility are not static between asset classes, it would not be prudent to build your portfolio

based on observations from past historical periods since correlations and volatilities, as we said are not static but,

change depending on economic conditions. For example, in the 1980’s correlation between US stocks and the 10y

US Bond was slightly more than +0.6 but, shortly after 2010 correlation between them was below -0.6. You cannot

afford to follow past long term historical observations and assume the future will be quite similar, that’s dangerous

and irresponsible.

The impact in the Asset

Management Industry


The nature, impact and effectiveness of diversification and multi-asset returns has changed

due to the strong connections and tight relationships across international financial markets.

The following chart from Wikipedia is “eye-opening”. We can see that up until the end of

1990, there were 6 multilateral free trade agreements. But at the end of 2016, there are

over 20 free trade agreements, which means that the source of wealth and growth for many

corporations is outside the borders of their own home country. For example, consider Apple

or Starbucks. Imagine that in the USA alone, 44% of the sales generated by S&P500

companies is achieved outside the borders of US!

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This is having a tremendous and real impact for your portfolio and investments too, even if you hadn’t

realized it.

For what kind of diversification and dispersion of risk are we talking about, when all the international

markets are so well connected?

We bet that you have heard the old saying, “don’t put all your eggs in one basket”. So, if you decide to

put together an investment or pension portfolio and you decide to invest, let’s say 40% in equity

markets, you do the wise thing and you diversify your assets across different markets. Perhaps, a little

bit in the FTSE, another portion in the S&P500, another in Eurostoxx or even Emerging markets and so

on.

You thing you have done the right thing and you are diversified right? If the FTSE drops for instance then

something else will rise and “smooth” your potential losses, that’s the essence of diversification.

But you couldn’t be more wrong!

Due to all the factors that we mentioned above, when there is a financial crisis, they ALL move together

at the same direction, it wouldn’t make a difference if you have invested in only 2 indices or 20!


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Firstly, take a look at a period where things are “normal”, nothing exciting happening!

You will see that correlations are within reasonable ranges and being diversified makes

sense.

Please take a look at the following correlation matrix, produced by HSBC Quantitative

Research that demonstrates the impact of risk events in the correlations of various

different financial assets.


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But the scope of diversification is not to help you during good, “normal” periods but, in “bad” periods when we are faced by strong risk aversion and possibly shocks in the markets.

Please take a look into what happened in international markets, across different asset classes when Lehman Brothers collapsed in the US in 2012, causing chaos in the markets

You will notice that during the crisis, global equity indices became strongly positively correlated,

as the correlation heat-map is showing us. On the other hand, fixed income market were moving

the entirely opposite way than equities.

Imagine that you followed popular advice and you were diversified across different equity

markets, so you spread the risk, only to watch them move “south”, all of them together at the

same time!


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Global retirement savings gap

Demographics

Low savings rates

Low yields and returns environment

Central banks providing massive liquidity to the financial system

Distortion of historical correlations and return/risk characteristics across assets

Impact in economy and assets from globalized, interconnected markets

This is having a real impact in your life and your investments or pension fund right now. Even

if you have no interest for the investment world, you need to be concerned.

The last few year returns on multiple assets have been much lower compared to their

historical averages, as you can see from the chart below created by GMO and shows us

annual REAL returns over the last 7 years, compared against the historical long term returns.

Future impact and Practical

Implications

Let us consider everything we have mentioned so far:


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You will notice that during the crisis, global equity indices became strongly positively correlated,

as the correlation heat-map is showing us. On the other hand, fixed income market were moving

the entirely opposite way than equities.

Imagine that you followed popular advice and you were diversified across different equity

markets, so you spread the risk, only to watch them move “south”, all of them together at the

same time!

You can see that annual returns have been considerably below long term averages, which

means practically that pension or investment funds returns have been much lower and

cannot cover future liabilities.

This is not expected to change at least in the short term future.

Pictet Asset Management, that is managing $151 billion globally, has been estimating that

expected returns of diversified, traditional portfolios, over the next 5 years, up until March

2022, are going to be in the range from 0 to 1.5%, if you choose a balanced 50-50 allocation

that is 50% bonds and 50% equities. Not much to expect!


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As you can see on the chart below, J.P. Morgan for 2018 is also forecasting lower expected

returns for popular 60-40 portfolios, around 5% with an expected volatility just below

10%. You can see how they lower their expectations for 2018, compared to 2017 original

estimates. Future expected returns are revised lower for all asset classes.

We have identified and analyzed the current situation and issues that the investment

and pension world is facing.

Let us now present you a solution!


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The most important question is, what are we going to do next? What

are doing next and what would be the most efficient and effective

way to create an investment or pension portfolio?

In the financial world changes and challenges are constant,

particularly in our time, due to the synchronicity of the global

markets. We are presented with diverse opportunities across multiple

asset classes ranging from Equities and Fixed Income, to opportunities

in emerging markets, real estate, commodities and other alternative

investments.

As the financial environment is evolving, creating and managing your

investment portfolio becomes a more complicated task than it used to

be. What kind of choices you will make, how will you identify those

assets that will generate the highest possible returns, with the

smallest exposure to risk in your portfolio?

In the last few years we have witnessed a great momentum in the

search for “smart beta”, resulting in a shift from active management

towards more passive mandates.

Even if we go back to 2014, the very reputable UK’s Pension

Protection Fund announced that it would change benchmarks to

monitor managers based on a minimum volatility mandate and at the

same year State Street Global Advisors announced that “Majority of

institutions to move towards smart-beta investments”.

But what is "smart beta"?

You won’t get a definitive answer. Lots of hype, plenty of marketing

material but still there are plenty of views about what is “smart beta”.

There are managers calling it “scientific beta”, “advanced beta”, “new

beta”, even “fundamental indexing” but the most popular term

remains “smart beta”.

Solutions! A New Adaptive

Approach


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One key characteristic of smart beta strategies is that they have factor exposures to well-documented

and academically researched financial markets’ anomalies such as:

• Value: outperformance of undervalued stocks (e.g. Price/book ratio)

• Small Cap Outperformance

• Momentum

• Low Volatility

• Quality (outperformance of equities with strong, consistent earnings)

• Relative Strength

• Mean reversion

As an example, please find below the performance of a rather conservative portfolio we put together

that aims to outperform a “60-40” portfolio but with lower volatility.

We applied a tactical asset allocation approach based on three smart beta factors and we rebalance the portfolio periodically to gain better exposure to those factors.


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Use a combination of different smart beta factors to create your portfolio

Diversify not just across different asset classes but across different strategies

Do not rely only on LONG only strategies but start employing a LONG/SHORT approach

Start rebalancing regularly and move away from “buy and hold” or strategic asset allocation

approaches

Rebalance your assets based not only on return/risk characteristics but also start managing

volatility in your portfolio

“Smart Beta” is definitely not the panacea to problems of the asset management industry. The

downside is that you are not going to always outperform the market and depending on the phase of

the economic cycle, smart beta indices can underperform cap weighted strategies for long periods of

time.

Here are two problems that we are facing:

Traditional mixed equities-bonds portfolios (like the popular 60-40 allocation) will not perform

well in today’s financial environment, where we are facing low growth and potentially higher

inflation in the future. We can have a situation where BOTH bonds and stocks could move lower

together, remember what we said previously about historical correlations and financial regimes.

Smart beta portfolios can easily outperform the market in the longer run but, we could still face

drawdowns and underperformance for a significant period.

The solution is to start thinking “outside the box” and be adaptive to the changing environment.

According to Darwin it is not the stronger or the smartest that survives but the most adaptive to the

new challenges!

Traditional mixed portfolios will not perform as they used to do in the last 40-50 years, this is a totally

new regime. You cannot rely exclusively in just one smart factor or just one strategy and expect to

outperform the market in all the different conditions.

What you need to do is:


Let us show you an example of a “hybrid”, tactical-macro portfolio that combines successfully different

factors from different approaches. The key characteristic is a regime recognition “switch”, a recognition

of the current investment environment and an exposure to those assets that would perform better in

that specific regime.

This allows us to get exposure to “smart beta” factors but we also use a systematic, macro approach

that is allowing us to understand which assets would outperform in the current regime.

Therefore, if we are in a “risk on”, positive regime, the strategy will still focus on smart beta

techniques but within a specific group of assets that would outperform in that particular macro regime.

On the contrary, if we are in a “risk off”, negative environment, we will still have exposure to smart

beta factors but within a specific group of asset classes that would “behave” better in that risky

environment.

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Here are the results, if we combine smart beta factors together with systematic macro "switches".

Let us show you an example of a “hybrid”, tactical-macro portfolio that combines successfully different

factors from different approaches. The key characteristic is a regime recognition “switch”, a recognition

of the current investment environment and an exposure to those assets that would perform better in

that specific regime.

This allows us to get exposure to “smart beta” factors but we also use a systematic, macro approach

that is allowing us to understand which assets would outperform in the current regime.

Therefore, if we are in a “risk on”, positive regime, the strategy will still focus on smart beta

techniques but within a specific group of assets that would outperform in that particular macro regime.

On the contrary, if we are in a “risk off”, negative environment, we will still have exposure to smart

beta factors but within a specific group of asset classes that would “behave” better in that risky

environment.


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…or maybe you are willing to accept a slightly higher risk, in return of a higher performance. Then

you should learn how to create a well-diversified portfolio, combining different asset classes, from

equities to bonds and discovering how to adapt to different market environments.

Get solid risk-adjusted performance using ETFs portfolio that shows strong all-weather

performance.

We can teach you how to do it yourselves.


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Maybe, you don’t want to have portfolio consisting of ETFs. Perhaps you wish to invest actively in the

equity markets and invest in stocks only.

It really doesn’t matter, it wouldn’t make any difference.

The same principles would still apply.

You will still need to focus on smart factors and strategies that have a clear and undeniable edge.

Let us show you an example based on the European equity markets but, the same principles can be

applied in any other stock market.

This is a period from June 1999 to June 2011, a 12 year period that included a stock market bubble in

1999, two recessions one in 2001 and the other from 2008-2009 and two bear markets (2001-2003,

2007-2009).

How much would you have made during this period if you had bought the Eurostoxx index back in 1999

and hold it up until 2011? Take a look at the table below:

Not impressive is it?

In 12 years you would have achieved a total return of 10.53%, which means 0.91%

annually! You would have also faced drawdowns in the range of -60%! Do you think you

would have kept your composure and stay invested during these episodes of shock in the

markets? Most people cannot do that, the “pain” is enormous and they simply want to get

out!


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However, if you had decided to employ a smart factor approach and be disciplined, you would have

seriously outperformed the Eurostoxx index. If you had chosen to invest in the 20 best stocks that

fill certain criteria, for example the strongest momentum, combined with the lowest Price-to-book

ratio, you would have achieved a compound annual growth of 1157%, at an annual rate of 23.5%!

Please do compare those returns to the index, the Eurostoxx returned 10.53% overall, on an annual

basis of 0.91% but, if you had chosen just two simple factors, you would have made 1157%, at an

annual rate of 23.5%!

Here is another example, of a smart beta approach applied in the Large Cap UK stock market.


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There are also other financial firms in the US that clearly demonstrate similar conclusions, when

they apply their research in the US equity markets. For example, Northern Trust Quantitative

Research, a very respectable firm, performed an analysis on the Russel 3000 to find out what

would have happened if someone would combine different smart factors.

The results speak for themselves.

You can see on the Return/Risk chart that any combination of smart factors would outperform the

Russell 3000 index by a significant margin.

Russel 3000 yielded a return just above 12%, with a 20% risk but if you had decided, for instance, to

combine Quality and Value factors, you would have made 22% return with slightly less risk.

The good news is that at Fotis Trading Academy, we can offer you the knowledge and the tools to

do that yourselves and seriously improve the performance of your pension or investment portfolio.


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If you simply want to chat about your choices, without any pressure or sales

pitch, simply go to www.fotistradingacademy.com

and schedule a call…

Act NOW! Stop saying tomorrow!

Live the life you really want…


http://www.fotistradingacademy.com/

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