LMG Emerge Global Tactical Asset Allocation July 2010


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July 2010 Performance update of the LMG Emerge Global Tactical Asset Allocation model.

This presentation includes a description of the model, a live performance update (period July 2005 - June 2010) and an outlook with summarized information for the situation as of July 1, 2010.

Published in: Economy & Finance, Business
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  • The latest update of our GTAA (Global Tactical Asset Allocation) presentation. The first three chapters deal with the structure of the model and our investment approach. For those of you who saw our earlier presentations (May and June 2010): there are no changes.

    Chapters 4 and 5 contain our performance update and current market outlook respectively. These chapters were of course updated. June 2010 performance was good. Both 'picking' and 'timing' added value, with picking doing the better job this time. All strategies, except for the Gold-Only strategy outperformed. However, the gold-cash safety valve did continue to add value in the Mix Strategy.
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LMG Emerge Global Tactical Asset Allocation July 2010

  1. 1. The LMG Emerge Asset Allocation System A Structured Approach Tailor-made Solutions to Portfolio Management Problems YOUR LOGO
  2. 2. Abstract 1. GTAA is the 'linking pin' between the ALM/SAA and the „security picks' 2. LMG Emerge adheres to a structured bottom-up/top-down approach based on an innovative optimization methodology that can easily incorporate client constraints and tailor-making 3. Our GTAA advisory system is one of the most extensive in its kind. 4. It encompasses 5 asset classes (Equities, Bonds, Cash, Currencies and Gold) and 50 countries 5. Add-ons include: 1. Direct link to LMG Emerge Manager Selection Approach 2. Extension with 50 additional countries (Frontier Markets) 3. Incorporation of Alternatives as an Asset Class 6. The LMG Emerge GTAA framework has generated risk-adjusted out-performance YOUR LOGO
  3. 3. Abstract (2) Result: LMG Emerge Structured GTAA Extra layer for "Alpha Generation" Better "Pension Fund Governance" Improved "Risk Control“ Can easily incorporate client requests and constraints Valuable source of important information that can be used elsewhere in the investment process YOUR LOGO
  4. 4. Presentation Outline 1 LMG Emerge 2 Asset Allocation 3 LMG Emerge GTAA: General, Process and Product 4 Performance and Asset Class Allocation of Strategies 5 An Example: What we did and what we think today A1 Appendix 1: Deliverables A2 Appendix 2: How we would work together with your firm YOUR LOGO Page  4
  5. 5. 1. LMG Emerge LMG Emerge: areas of expertise* LMG Emerge GTAA Markowitz-van Dijk Near Optimization ** Consultancy and Education/Training * This chart does not represent a company organizational chart ** Based on a research cooperation started in 1997 (see also Markowitz, van Dijk; FAJ March-April 2003 and Mark Kritzman c.s., MIT working paper, February 2007) YOUR LOGO
  6. 6. 1. LMG Emerge (2)  LMG Emerge Global Tactical Asset Allocation (GTAA)  Institutional and High Net-Worth clientele  Tailor-made strategies have been developed for end users in the US, UK, Switzerland, France, Germany, the Netherlands and Singapore  Further expansion into Asia and Emerging Markets envisioned  Integrated with LMG Emerge’s Manager Selection approach YOUR LOGO
  7. 7. 2. Asset Allocation Gary Brinson et al.: "The bulk of investment success or failure can be explained by asset allocation decisions" YOUR LOGO
  8. 8. 2. Asset Allocation (2) Current practice:  Asset Allocation  Asset-Liability Management (ALM Study)  Strategic Allocation (SAA)  Tactical Asset Allocation (GTAA) But…..  Contrary to ALM and SAA;  Tactical Asset Allocation often ad-hoc and unstructured YOUR LOGO
  9. 9. 2. Asset Allocation (3) Current Practice Better structure for increased risk-adjusted returns: ALM/ ALM/ Alpha At Risk SAA Risk Control Gap SAA ??? Structured GTAA Bonds Equities Other Bonds Equities Other YOUR LOGO
  10. 10. 3. LMG Emerge GTAA What does our GTAA product look like? 3. LMG Emerge GTAA; 1. Introduction 2. The Process 3. Product Details 4. Performance (see chapter 4) YOUR LOGO
  11. 11. 3.1. Introduction LMG Emerge GTAA Client-specific risk profiles & ALM/ SAA Other constraints Structured Optimal structure for higher GTAA and TAILOR-MADE risk-adjusted returns: Bonds Equities Other LMG Emerge GTAA Link to LMG Emerge Manager Selection YOUR LOGO
  12. 12. 3.1. Introduction (2) LMG Emerge GTAA Harry M. Markowitz & Erik L. van Dijk Financial Analysts Journal, March-April 2003 "Optimal Portfolio Construction is not the same as Textbook Mean-Variance Optimization" YOUR LOGO
  13. 13. 3.2. Process LMG Emerge GTAA LMG Emerge‟s GTAA product is the result of more than 20 years of research Essential underlying principles of the process are: “Man-Machine” “Near Optimization” “Be active when you can, but passive when you have to” „‟Fundamental instead of purely Market Value-based Indexing‟‟ „‟Do not fight structural, long-term tendencies of markets‟‟ „‟Monitoring tool for short-term trend discrepancies (Early Warning System)‟‟ YOUR LOGO
  14. 14. 3.2. Process (2) “Man-Machine”  Market prices are ultimately the result of supply and demand by human buyers and sellers. Structuring these complex market processes by using computers is fine, but we do have to capture this human factor as well.  Quantitative, fundamental and behavioral /technical factors do all play a role in the LMG Emerge GTAA framework YOUR LOGO
  15. 15. 3.2. Process (3) “Near Optimization”  Traditional optimization techniques don‟t work well for GTAA. The innovative “near optimization” technique created by Markowitz-Van Dijk works better.*  More efficient incorporation of risk  No problems with new asset classes / non-normal return distributions * = See also: Mark Kritzman (MIT, State Street), Simon Myrgren (State Street) and Sebastien Page (State Street), MIT/State Street Working Paper, February 2007 for proof of the qualities of ‘near optimization’ (available at LMG Emerge) YOUR LOGO
  16. 16. 3.2. Process (4) “Be active when you can, but passive when you have to”  Beating financial markets is not easy (market efficiency)  But it is definitely not impossible:  Skill  Hard work  Monthly model updating  Annual recalculation of underlying national return- and risk models  Know yourself and your skill set and go passive when necessary  Realistic, pragmatic approach essential  Take into account GTAA peculiarities (large average bet size!)  Avoid unnecessary risks YOUR LOGO
  17. 17. 3.2. Process (5) “Fundamental Indexing‟‟  „Market Value-based Indices have an innate tendency to overreact and incorporate large-cap tilts‟.  Fundamental Indices try to capture who will be the winners in the future  Market Value-based Indices capture who were yesterday‟s winners • = See also: • R. Arnott, J Hsu and Ph. Moore: ‘’Fundamental Indexation’’, Financial Analysts Journal, 2005 YOUR LOGO
  18. 18. 3.2. Process (6) “Do not fight structural long-term tendencies of markets‟‟  There are some strong, underlying longer-term macro laws driving markets. These laws provide a linkage to Strategic Allocation / ALM. Incorporate them in your strategy instead of trying to fight them. Follow / Incorporate structural economic and monetary growth stories  Emerging Markets are here to stay in this Changing World  Globalization and growing focus on Governance  Mean Reversion / Overreaction: Markets do often overreact YOUR LOGO
  19. 19. 3.3. Product Details LMG Emerge: “In a period in which Emerging Markets are getting more important, part – but not all – of our success is related to the incorporation of all countries in the MSCI World and MSCI Emerging Markets indices” YOUR LOGO
  20. 20. 3.3. Product Details (1) – Countries in the Base Model YOUR LOGO
  21. 21. 3.3. Product Details (2)  Asset classes: Equities, Bonds, Cash, Currencies and Gold  Integrated risk model (ExpecTAA®) that looks at Volatility, Beta, VIX, Interest Rate Sensitivity and Inflation Risk  Tailor-making of the solution to incorporate your risk profile and constraint set YOUR LOGO
  22. 22. 3.3. Product Details (3)  Model structure LMG Emerge GTAA– Model Structure I. Top-down (asset class level) & Bottom-up (country level) II. Integrated Annual, monthly and intra-month modules III. Integration of risk & return (Utility, Sharpe, Treynor) IV. Active Base Model plus Derivative Overlay based on Index Products* V. Factor models derived using a stepwise methodology VI. Transparent structure: no black box * = Derivative Overlay can be capped according to client’s needs / constraints YOUR LOGO
  23. 23. 3.3. Product Details (4) Factor Blocks Variables Technical Momentum Overreaction Seasonality Fundamental Dividend Yield Risk Beta Volatility VIX Macro Inflation Economic Growth Interest Rates Inter-market Flows Several flow variables YOUR LOGO
  24. 24. 4. Performance General observations about Performance LMG Emerge GTAA– Performance Main strategies deliver outperformance without excess risk taking Both the timing and picking components of the model contributed Live performance (see next pages) confirms results of the 1994- 2005 back tests Strategic decision to add Gold to Mix Strategy was good, but ex- post we could have allocated more. I.e. underperformance in Gold-Only Strategy YOUR LOGO
  25. 25. 4. Performance(2) Mixed Strategy Live – Returns in US$ : 2005(7) – 2010(6) YOUR LOGO
  26. 26. 4. Performance(3) Mixed Strategy Live – Asset Class Weights: 2005(7) – 2010(6) YOUR LOGO
  27. 27. 4. Performance(4) Global Equities Strategy Live – Returns in US$: 2005(7) – 2010(6) YOUR LOGO
  28. 28. 4. Performance(5) Global Equities Strategy Live – Asset Class Weights: 2005(7) – 2010(6) YOUR LOGO
  29. 29. 4. Performance(6) Emerging Equities Strategy Live – Returns in US$: 2005(7) – 2010(6) YOUR LOGO
  30. 30. 4. Performance(7) Emerging Equities Strategy Live – Asset Class Weights: 2005(7) - 2010(6) YOUR LOGO
  31. 31. 4. Performance(8) Global Bonds Strategy Live – Returns in US$: 2005(7) – 2010(6) YOUR LOGO
  32. 32. 4. Performance(9) Global Bonds Strategy Live – Asset Class Weights: 2005(7) – 2010(6) YOUR LOGO
  33. 33. 4. Performance(10) Performance Indicators of Base and Mix Strategies - I 2005 (7) – 2010 (6) YOUR LOGO
  34. 34. 4. Performance(11) Performance Indicators of Base and Mix Strategies - II 2005 (7) – 2010 (6) YOUR LOGO
  35. 35. The LGM Emerge GTAA System An Example What do we think of the situation as of July, 2010? YOUR LOGO
  36. 36. 5. Example: Current Situation as of July 2010 -Although we are positive about Equities MLT and LT, we are still underweighted - Gold performed well, but we brought our weight back to zero now that prices are at a record high - Notwithstanding the low money market rates, the allocation to Cash is large. This is partly done to reduce the duration of the Fixed Income portfolio - Bond position expanded and overweight in Equities EM slightly reduced. Short-term fears do not translate into LT worries. - We remain on the alert to grab opportunities when they appear YOUR LOGO
  37. 37. 5. Example: Current Situation as of July 2010 (2) Top-10 Holdings Equities - Equities in underweight.; slight overweight in EM’s reduced - VIX and Euro nervousness translates into more or less ‘normal’ equity portfolio - After CHIN and BRA, KOR now third EM country in top-10 holdings. - ITA presence in top-10 remarkable: we believe it suffered from overreaction to Greece / Euro issues - Smaller countries / Non- top10: 24.1% of weight - ‘Picking’ strategy added value in June 2010 YOUR LOGO
  38. 38. 5. Example: Current Situation as of July 2010 (3) Top-10 Over-/Underweights Equities - Anglo-Saxon underweights create a relatively flat distribution - EM overweight reduced compared to last month, basically through reduction of BRA portfolio; ISR remains remarkable overweight after the country was recently admitted to the MSCI Developed Index -ITA can benefit from a solution for GRE according to us; SPA disappeared from top-10 due to new doubts about its financial position - NED remarkable underweight; doubts about formation of a new coalition, several fraud cases and an investigation into the regulatory role of the Central Bank cause nervousness YOUR LOGO
  39. 39. 5. Example: Current Situation as of July 2010 (4) Top-10 Holdings Bonds - Large component of bond portfolio characterized by Quality focus - But some remarkable speculative elements create a U-shaped portfolio. - More speculative top-10 holdings include ITA, SPA (EU solves its issues and/or ITA/SPA should not be part of the PIGS group or be associated with it) and even GRE ! - Weight in USA, JAP and GER (quality core of portfolio) further increased to about 55 percent . - Picking added value in June 2010. - Below average durations. YOUR LOGO
  40. 40. 5. Example: Current Situation as of July 2010 (5) Top-10 Over-/Underweights Bonds - US underweight in Equities partly compensated by overweight in Bonds - Although big, quality countries dominated the top-10 we do see some large overweights in smaller countries including GRE, NED, FIN, AUS and NOR - Scandinavian play brought back to neutral position - NLD overweight is speculating on increased focus on the economy among major parties in the elections (June 2010), but it is partly compensated by an equity underweight with difficult coalition negotiations being a risk factor - JAP bonds biggest underweight. Low interest rate climate and risk of inflation- induced increases make the YOUR LOGO country relatively less attractive.
  41. 41. Appendix A Add-Ons Which add-ons are available?  “Style”  Equities opportunity set to include Value-Blend-Growth and Large-Mid-Small in major areas  “Currency Hedge Information”  Local currency, fully-hedged version of the system with separate currency overlay strategy  “Manager Selection”  Direct link to LMG Emerge Manager Selection database (through a partnership with CAMRADATA Ltd)  “Additional Asset Classes” or „‟More Countries‟‟  The possibility to add asset classes or countries of your choice to the model Available: – Alternatives 1 (Hedge Funds) – Emerging Market Debt – Alternatives 2 (Commodities) – Real Estate – Frontier Markets YOUR LOGO
  42. 42. Deliverables What is included when using LMG Emerge for your GTAA advice?  Customized monthly Fact Sheets with strategy results  The 4 base strategies (see chapter 4)  Your tailor-made Mixed strategy / strategies  Individual Country Fact Sheets  Monthly conference call to discuss and analyze model output and tactical advice (optional)  Quarterly General Outlook YOUR LOGO
  43. 43. Portfolio Output  Customized monthly Fact Sheets with strategy results  The 4 base strategies (see chapter 4)  Your tailor-made strategy / strategies YOUR LOGO
  44. 44. Country Information • Individual Country Fact Sheets YOUR LOGO
  45. 45. ExpecTAA (add-on product) • Attribution and Risk Analyses based on the underlying GTAA Regression Framework (ExpecTAA® software tool) YOUR LOGO
  46. 46. General Outlook  Monthly Market Report YOUR LOGO
  47. 47. Appendix B You and Us How would LMG Emerge work together with your firm or fund?  We believe that a tailor-made, transparent GTAA solution that is directly linked to your strategic / ALM guidelines is one of the most important elements explaining the difference between investment success and failure  LMG Emerge‟s GTAA product is made to give you the tools to be successful  The robust basis of our system (e.g. close cooperation with a Noble Prize laureate), the integrated attention that is given to return and risk, and the ongoing updating of the system ensure that you are ready for a changing (investment) world Various Service Packages possible, Ranging from system-only to more tailor-made YOUR LOGO
  48. 48. Thank you for your attention! LMG Emerge Oirschotlaan 19-21 3704 HK Zeist, The Netherlands Tel: +31306953828 http://www.lmg-emerge.nl http://www.facebook.com/NewEconomies http://tigersandfrontiers.blogspot.com http://www.twitter.com/lmg_emerge http://www.slideshare.net/lmgemerge YOUR LOGO