KPMG Investment AdvisoryKey ideas alert – April 2010
Patrick McCoy Welcome to the second edition of our key ideas alert. The first quarter of the year proved to be broadly positive across many asset classes. However risks and uncertainty still remain; the problems around Greece's debt problems, investigations into Goldman Sachs by the FSA and SEC have reminded markets that we are not out of the woods yet. Key in the UK is the upcoming general election on 6th May and the potential impact of a hung parliament on markets. A minority government which fails to implement an appropriate strategy to tackle the deficit may result in a sharp rise in gilt yields and also affect overall equity market sentiment if the outlook for the economy remains unclear. We highlighted the issue of rising real yields and inflation in our Q4 Hot Topic paper and have been advising clients on taking appropriate action in response. We present some of the new investment ideas we have been taking to our clients below. Turning to the business overall, we have been successful in winning four new trustee client appointments worth a combined £1bn in assets. We remain focused on ensuring that we provide clear advice and direction to our clients. As such, we are continuing to add to the team across all levels. Our focus on ensuring our strong culture is not diluted remains crucial and our focus is on finding the right individuals that complement our existing team. As always we appreciate any feedback and views, if you would like to, please click here. Regards, Patrick McCoy
Proactive thinking. Clear direction
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Fundamental Indexing – The Concept |
Our research into Fundamental Indexing has concluded that it represents a sensible method of investing in a way that complements limited governance structures, but there are arguments that fundamental indexing is not definitively superior to traditional market capitalised weighted strategies.
Over the last few years there has been considerable academic and institutional research looking into methods to improve the returns from passive investment, the goal being to find better methods of investing passively to control risk and improve returns.
One such alternative approach is Fundamental Indexing.
A fundamental index is constructed based on a company’s “economic footprint” which is in turn based on fundamental measures of size. The idea is to try to improve the construction of the index itself and provide better risk-adjusted returns than a traditional approach.
Whilst there are some benefits to this approach our paper outlines some of our key findings that clients should be made aware of in considering fundamental indexing.
Click here to download our briefing sheet on Fundamental Indexing
Emerging Markets – Investing Passively |
Following our briefing paper on emerging markets in which we proposed clients make a long-term strategic allocation to emerging markets, we have undertaken some research on accessing this exposure through equity markets.
Whilst there are many theoretical arguments for investing actively in emerging markets this was not borne out by our research and analysis. We concluded that emerging markets should be assessed through a passive vehicle.
From our research of over 700 emerging market funds, we concluded that the ability of active investment managers to add material returns above the benchmark can be hampered by a number of exogenous factors, such as: higher fees, volatile asset flows into and out of emerging markets and higher trading costs.
In particular we found that alpha was low and inconsistent across multiple time periods. There is a case for active management to protect capital in down markets; however this will require a long time horizon and also understanding of underperformance in strong momentum bull markets.
Click here to download our briefing sheet on Emerging Markets
Global Small Cap Equity – Is there merit in a separate allocation? |
We assessed whether there was any merit in enhancing the returns from a standard equity portfolio through an additional specific allocation to small cap equities.
From our initial research we have concluded that trustees in pursuit of diversification or return enhancement, are likely to see more benefit by focusing their attention on an allocation to alternative asset classes, rather than making a specific allocation to small cap equities.
From our quantitative analysis we concluded that global small cap equities have over time tended to provide broadly similar returns to global markets but with higher volatility.
In addition we find that given the high correlation (tending towards one over time) of global small cap does not offer significant diversification benefits from global equity markets.
Click here to download our briefing sheet on Global Small Cap Equity
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