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Chasing Alpha

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From CIO to CIO – the message is the same. There will be more volatility and extended periods of lackluster returns. Dropping hedge funds months back, the California Public Employees’ Retirement System (CalPERS) will eventually (don’t know how long) move its discount rate from 7.5% to 6.5%. Smart beta, otherwise called factor-based investing, can assist institutional investors on their quest to reach target returns, but active management can play a major role in providing extra juice. The debate on the efficacy of active equity management remains tense. Statistics do not lie, as the usage of exchange-traded funds (ETF) among institutional investors increased over the decade. In addition, a number of academic studies have illustrated the difference in performance from the top manager and average manager in large-cap U.S. mutual funds narrowing. In my opinion, investors need to rethink Modern Portfolio Theory and not let the constraints of the past be the drivers of the future. Assumptions can be dangerous and proved to be so during the global financial crisis. As a financial commentator and president of a research company on asset owners, I will [try to] avoid being pessimistic in the remainder of this article and focus on the future strategies.

Alpha is Out There

Despite rhetoric, in my opinion, finding alpha has never been easy. It is risky, time consuming and can be expensive. Fortunately for me, the peripatetic nature of my job, allows me to get perspective on alpha from a wide range of institutional investors. From the shores of New Zealand, to the streets of Ankara and to the Toronto skyline, the generation of alpha is occurring. Skilled managers and asset owners are discovering streams of alpha, at times employing complex strategies. Notable hedge funders like Bill Ackman are backed by pensions, endowments and other asset owners. Ackman runs Pershing Square Capital Management which recently increased its stake in Canadian pharmaceutical company Valeant Pharmaceuticals from 5.7% to 9.9% according to an SEC filing. Ackman’s alpha is his concentrated bets. Yet despite U.S. Democrat Presidential Candidate Hillary Clinton tweeting disgust on pharmaceutical price gouging or a nasty short-seller report from Citron, Ackman could generate serious alpha if Valeant’s stock turns around.

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In our upcoming January 2016 issue of The Sovereign Wealth Quarterly, there will be a focus on alpha and some of the sources where asset owners such as wealth funds, pensions and endowments are harvesting it. I’m not advocating allocating wads of cash to a flashy hedge fund, but what I am trying to illustrate is that there are large asset owners beating the benchmark. This could be internal management timing strategies, finding “alpha hunters”, concentrated portfolios, small-cap stocks, or even investing in niche industries in frontier markets. Today, there are plenty of asset managers generating alpha for their clients despite what people say. Finding the right manager and monitoring them is another story. However, with the right incentives in place, these managers can be indefatigable hunters of alpha. For example, we are witnessing through SWFI Compass (our RFP and opportunity service), an increase in demand for skilled, active, small-cap managers. Small-cap stocks can offer a higher risk premia, due to factors such as volatility and trading costs.

However, there are shortcomings of discovering alpha sources whether through a skilled manager (eventually people find out) or on one’s own efforts. Alpha is not sustainable – investors, the market eventually finds out. How many times can the Seattle Seahawks quarterback Russell Wilson carry the team to NFL championships? Great ideas get copied. Furthermore, as wealth funds and pensions get bigger in asset size, the contributory effect of alpha strategies in their total portfolio return could diminish.

We are not going to bore you with investment models and endless empirical literature on whether alpha is dead or not. We are going to cover themes and strategies used by asset owners to generate “alpha” or bits of it at least.

Here are 5 themes on alpha, SWFI staff wants to highlight (not necessarily in this order):

    1. Small-Cap Stocks (Active Management)
    2. Becoming a Lender and Other Credit Opportunities
    3. Insurance-Linked Securities and Catastrophic Risks
    4. Selecting Skilled Managers
    5. Activist Strategies and Concentrated Portfolios

The views in this article are expressed by Michael Maduell.
Michael Maduell is President of the SWFI.
www.swfinstitute.org

HKMA Intervenes to Support Currency Peg for First Time Since May 2018

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The Hong Kong Monetary Authority (HKMA) intervened to defend its peg to the U.S. dollar. [ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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Genoa Motorway Bridge Collapses

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The 51-year-old Genoa bridge death total has risen to 35 people. On August 14, 2018, a highway bridge, known as the Morandi Bridge, in the center of Genoa had collapsed in torrential rains. The roadway, which was built of reinforced concrete, fell as much as 45 meters. The cause of the collapse was under investigation, according to Angelo Borrelli, chief of the Civil Protection Department. A good number of Italy’s viaducts, galleries and bridges were built during the 1950s and 1960s. Italy-based Autostrade is a motorway operator controlled by Atlantia S.p.A. Autostrade was conducting maintenance work on the bridge. Autostrade said it had been strengthening the road foundations of the bridge.

The Italian Benetton family founded the Benetton Group S.p.A. fashion company in 1965. Sintonia SA is the Luxembourg financial holding company controlled by the Benetton family, which has about a 30.25% stake in Atlantia. Singapore’s GIC Private Limited owns 8.14% of Atlantia as of March 31, 2018. BlackRock holds a 5.12% ownership stake in Atlantia during the same time period.

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Bill Gross Can’t Save Janus Henderson

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Speculation is swirling that legendary bond king Bill Gross could be ousted from the fund he oversees at Janus Henderson (JHG). However, Janus Henderson CEO Dick Weil is firm in his belief that Gross is fit for the position, though he also stated that Gross has been performing in a way that was “challenging and disappointing.” Bloomberg’s Francine Lacqua suggested that Gross could “taint” the overall picture at JHG.

After acknowledging that Gross was struggling, Weil was quick to defend him, pointing to his successful 40 year career in the industry. Weil expects Gross to recover from his current investment woes “in time.” He went on to underscore his unshakable confidence in Gross, “Bill’s a terrific investor, and a terrific, strong player.” Gross, for his part, is said to have admitted to making “bad bets,” according to Weil. Weil was only recently chosen over contender Andrew Formica, his Co-CEO, to serve as sole CEO of the company. Australian-born Formica was dismissed by JHG’s board of directors. JHG’s single largest shareholder is Japanese life company Dai-Ichi Life.

[ Content protected for Sovereign Wealth Fund Institute Standard subscribers only. Please subscribe to view content. ]

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