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.  

2  2  

 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?  

3  3  

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)  

4  4  

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.      

5  5  

Disciplines  to  Frame  New  World  Order  

Geopolitical    

Analysis  

Macroeconomics  

Game  Theory/Strategic  Decision  

Theory  

6  6  

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  

7  7  

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!  

8  

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  

9  9  

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