Indexing used to be simple. In the old days, a representative sample of securities was rolled into a portfolio, weighted by the respective market values, and left to drift with the market’s tide. This methodology—market cap indexing—is still used, of course. In fact, most of the planet’s assets linked to indexing reside under this conceptual framework. But it has plenty of competition these days. The challenge is figuring out which indexing methodology will be superior, given a particular set of investor expectations, goals, risk tolerance, etc. Before you can even begin to answer, however, you need a clear understanding of what’s on the menu. Where to start? A new research note from the folks at 1741 Asset Management sorts out the basics: “Alternative Beta: Catergorisation of Indices — Do All Roads Lead to Rome?”
ISM Index: Manufacturing Is Sluggish For 3rd Straight Month
Manufacturing activity in the U.S. contracted for the third month in a row in August, the Institute for Supply Management reports. That’s a sign that economic growth has been sluggish and is likely to remain so. The ISM Manufacturing Index dipped ever so slightly to 49.6 last month vs. 49.8 in July. Any reading under 50 implies that manufacturing, a key sector of the economy, is contracting. But the below-50 reading is shallow, which suggests that manufacturing is closer to treading water rather than shrinking per se. That’s hardly an encouraging reading. But given the ongoing growth elsewhere in the economy (assuming it holds up), it’s not yet clear if the moderately weak readings for this indicator are the last word on what happens next for the broader economy.
Major Asset Classes | August 2012 | Performance Review
Most of the major asset classes posted handsome returns in August, delivering another strong month for multi-asset class portfolios along the way. The Global Market Index (GMI), an unrebalanced, market-weighted mix of all the major asset classes, climbed 1.6% last month. For the year so far through August, GMI is ahead by a solid 7.2%.
Book Bits | 9.1.2012
● The New New Deal: The Hidden Story of Change in the Obama Era
By Michael Grunwald
Review via The Washington Independent Review of Books
If the Obama campaign sent The New New Deal to the 5 or 6 percent identified in polls as undecided, the investment might produce more votes than all the megamillions spent on attack ads. Not that Michael Grunwald has written a mash note to the incumbent. The New New Deal inflicts some deserved lumps on the president, his staff and his ostensible supporters in Congress. But Grunwald argues, persuasively, that Obama also deserves credit for two critical accomplishments: saving the country from a depression and setting in motion much-needed major changes in the fields of health care, green energy, education and transportation. He also explains why so many Americans missed the news.
Thinking About The Big Finale For Interest Rates
If you had to pick one chart that summarizes the big picture in economics and finance over the past generation or so, what would choose? How about the benchmark 10-year Treasury Note yield? Not only does this history tell us quite a lot about where we’ve been in macro and markets, the 10-year yield’s track record also provides perspective on where we may be going and what we should expect.
Income & Spending Update Boosts July’s Economic Profile
Today’s update on personal income and spending offers a fresh batch of data for thinking that recession risk remains low. Disposable personal income (DPI) continued to inch higher in July on a month-over-month basis. Meantime, personal consumption expenditures (PCE) staged a sharp revival in July, rising 0.42% vs. June—the best monthly improvement since February. As a result, the year-over-year trends for these indicators look considerably better—signs that income and spending may be stabilizing at moderate growth rates.
Exports & A Strong Dollar: Not Necessarily Perfect Together
It’s become fashionable in this election cycle in some circles to promote the idea of a strong dollar as a key part of the solution to the economic ills that plague the U.S. But simple “solutions” in economics aren’t always what they seem. That’s a caveat worth considering when it comes to America’s growing exports and how it relates to the value of the dollar. Arguing that America should have a strong dollar may sound good in a political speech, but the details can be messy.
Have Sharpe Ratios Peaked?
There’s a strong case for expecting that Sharpe ratios will be lower, perhaps a lot lower, for the stock and bond markets for the foreseeable future. What’s the source of this outlook? Gravity.
Research Review | 8.28.2012 | Risk Parity Investing Strategies
Will My Risk Parity Strategy Outperform?
Robert Anderson (University of California, Berkeley), et al. | July 2012
We gauge the return-generating potential of four investment strategies: value weighted, 60/40 fixed mix, unlevered and levered risk parity. We have three main findings. First, even over periods lasting decades, the start and end dates of a backtest can have a material effect on results; second, transaction costs can reverse ranking, especially when leverage is employed; third, a statistically significant return premium does not guarantee outperformance over reasonable investment horizons.
Estimating The Optimal Rebalancing Rules
Asset allocation and rebalancing are a powerful team with a history of improving the odds of earning a decent return. But in order to harvest the associated risk premium, you’ll have to deal with two big challenges. One is behavioral—rebalancing works best in a contrarian context, i.e., buy low, sell high. The other hurdle is technical—deciding when to rebalance, and by how much.