Transcript Strategic Asset Allocation - Investment Analysts Society

Strategic Asset
Allocation
The Case for Global
Capital Markets
Clark: University of Evansville
Contact Information
Robert A. Clark, Ph.D., CFA
Schroeder Family Dean
School of Business Administration
Vice President for Strategic Initiatives
University of Evansville
1800 Lincoln Ave.
Evansville, IN 47722
Telephone:
(812) 479-2851
E-mail:
[email protected]
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Tools to become Better Advisers
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Global Opportunities/Challenges
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Indian markets strong despite terror attacks
By Ilya Garger, MarketWatch
Last Update: 7:11 AM ET Jul 12, 2006
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BANGKOK (MarketWatch) -- Indian stocks advanced on
Wednesday as investors focused more on better-thanforecast earnings from technology giant Infosys
Technologies than a wave of terror attacks in Mumbai,
India's financial capital.
The benchmark Sensex index, which tracks 30 issues on the Bombay
Stock Exchange gained 2.97% to close at 10,930.09.
Infosys (INFZF : INFOSYS TECHNOLOGIES LTD SHS
INFZF0.00, 0.00, 0.0%) , India's second-largest software firm, reported
that net profit in the April-June quarter rose 50% on the year to 8 billion
rupees ($173 million), beating analysts' consensus forecast of 7.21 billion
rupees. Shares of Infosys rose 7.48%.
Financial markets showed resilience to the terror attacks. As many as 190
people were killed and more than 300 injured after eight explosions hit the
city's commuter rail network during Tuesday's evening rush hour. See full
story.
And most observers don't expect the bombing to hinder markets over the
long-term
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Major Challenge to 21st Investing: Understanding
the Transformations in Global Business
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Understanding the Challenge
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World’s Financial Assets
$118 trillion*
(and growing)!
(including bank deposits, government debt securities
and corporate-debt securities, and equity securities)
(*Year end 2003…. Versus $53 trillion in 1993, and
$12 trillion in 1980)
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Financial Assets
Shift away from banks and
toward market institutions as
the primary financial
intermediaries.
1980 banks represented 45
percent of financial assets, by
2003 they represented only
30 percent.
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World Markets
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US:
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Europe:
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Asia:
$44 trillion – dominated
by private debt and
equity.
Banks play a larger role
in finance.
Financial markets are
relatively isolated from
one another and differ
within the region.
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Financial Market Trends
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Corporate debt is expanding in both
the United States and Europe.
Japan growth comes from a huge
expansion of public debt.
China and Eastern Europe all asset
classes are growing quickly.
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Educational Gains
Ghana
Ethiopia
Thailand
Chile
Kuwait
Adult Lit
Primary
Secondary
Tertiary
Primary
Secondary
Tertiary
*World Bank (Ed Stats)
1990
58.5
31.8
30.8
21.3
60.2
42.9
12.1
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2003*
73.8
66.0
81.4
42.4
93.6
89.3
20.9
Developing Nations Now Constitute
40% of the World’s 50 largest
Economies
50% of the 50 Fastest Growing
Economies
70% of the 20 Fast Growing in
Industrial Output
5.5% Annual Growth in Higher
Education Grads vs. 1%
20% of the 50 Largest R&D Investors
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International Diversification
The goal of international
diversification is to benefit from the
less-than-perfect correlation among
various stock markets by forming a
portfolio among various stock
markets by forming a portfolio that
has lower risk than an otherwise
well-diversified portfolio of domestic
stocks.
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Foreign Stock Funds
Note: The average diversified
international fund holds more than
10% of its assets in emerging
markets names at the end of 2001, a
bit less in 2002, and a bit more over
the next four years.
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Diversification - Correlations
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Transitions over Time – Greater
Integration of Global Markets.
Egypt
1992-1997
1998-2003
1998-2003
South Africa
0.00
0.13
0.26
0.45
ME & Africa
0.52
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Zimbabwe
0.07
-0.07
A Global View
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Compound Annual Growth rate:
1993-2003
United States
Europe (Euro-Zone)
United Kingdom
Eastern Europe
Japan
China
India
8.6%
9.8%
11.3%
19.3%
4.0%
14.5%
11.9%
Source: MGI Global Financial Stock database
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Performance
1975-1995:
$1.00 invested
Africa:
$ 0.84
 S&P 500
$13.14
 Composite emerging markets $10.01
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2004 Emerging Market Winners
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Ukraine
Slovak Republic
Columbia
Jamaica
Egypt
Bangladesh
Romania
Hungary
Estonia
Saudi Arabia
170.33%
126.91
126.20
115.21
114.00
107.61
100.08
96.01
91.52
90.04
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2005 Emerging Market Winners
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Egypt
Jordan
Saudi Arabia
Columbia
Lebanon
Russia
Pakistan
Kenya
Korea
Romania
160.60%
120.00
115.10
113.50
111.78
85.70
66.00
65.38
62.60
61.09
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2005 Regions*
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Latin America
Asia
EMEA
Europe
E.Europe
ME & Africa
50.20%
25.70%
65.30%
67.00%
68.40%
64.40%
*S&P/IFCG Indices – Total Return through
December 2005
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Understanding the MAZE!
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Country Risk Analysis
Even though sectors may be more
important than they were 10 years
ago, countries have not evaporated
as a significant explanatory element
of multi-country portfolio returns.
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Country Risk Factors
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Political Risk
Economic Performance
Debt Indicators
Debt in Default or Rescheduled
Credit Ratings
Access to Bank Finance
Access to short-term Finance
Access to Capital Markets
Forfaiting
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Country vs. Sector Analysis
Current research indicates
that sector analysis
dominates country analysis
in selecting investment
options.
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Allocation Issues
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DECOMPOSITION of returns in terms
of factor decomposition indicates
that the country factor has declined
in importance and the sector factor
has increased in importance.
Countries used to be the
predominant explainer of returns,
and sectors were relatively less
important.
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International Accounting Standards
Accepting a valuation
orientation to investment
selection as investors search
for emerging market
opportunities the “quality” of
accounting information is
critical.
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Emerging-Markets Funds
Overall, they’ve
annualized gain
period, which is
types of mutual
posted a 24%
over the 2002-2004
better than all other
funds.
Note: They plunged 46% between
October 1, 1997 and September 30,
1998, due to local currency and
other problems.
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Fixed Income Investments-2004
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Average return for Emerging-markets
bond funds for 2004 ~10%
Bond-rating agencies have been upbeat
concerning Russia, as that country has
aggressively paid down debt. High oil and
commodity prices have helped producers
such as Russia, Brazil, and Venezuela.
Meanwhile, Turkey’s improving public
finances have also have also encouraged
investors, as that country has
strengthened its bid for European Union
membership.
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Fixed Income - 2005
According to Morningstar Inc., returns on
bonds that invest largely outside of the
U.S. ranked as the second worst
investments in 2005 with a -3.2% return.
Emerging market bond funds hit
record highs in 2005 returning
12% on average.
The dollar rose almost 14.6% against the
euro and 15.2% against the yen in 2005.
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Fixed Income Investments
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Sixth consecutive year of doubledigit returns.
Since the start of the emergingmarkets bond rally in 1999, this
category’s average annual return
of 15% Tops those of virtually all
fixed income and equity
categories.
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Emerging Markets Bond Average*
2004 YTD (%)
3-Year Return (%)
5-Year Return (%)
Expense Ratio (%)
*Source: Morningstar
10.65
17.51
15.22
1.00
(accessed 2/18/2005)
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Global Diversification
If investors are concerned
about the classic definition of
risk-the volatility of a
portfolio – they can reduce
risk by holding more bonds,
not by changing the
composition of their equity
allocations.
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Emerging Markets
Transparency
 Legal and Regulatory Framework
 Liquidity
 Transparency
……………..Increasingly Integrated!
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Questions?
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Conclusion…..
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Whatever their Objective….
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Investment Strategic Review
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