Corporations have often taken the position that when it comes to sustainability or other socially responsible issues, the costs outweigh the benefits for the bottom line. In his book Capitalism and Freedom, published in 1962, economist Milton Friedman wrote: Continue reading
After the 2008 financial meltdown proceeded from a credit to a liquidity crisis, the 27 countries that comprise the Basel Committee on Banking Supervision sought a solution to mitigate catastrophic losses should such an event happen in the future. The new measures, which build upon the Basil I and II agreements passed in 1992 and 2004, introduce two new liquidity ratios to ensure banks maintain 30 days of cash reserves in the event of crisis situations. The implications will be felt outside the banking industry. As banks seek to comply with the regulations and increase their equity ratios, they may have less of a desire to issue debt. Further, they will seek longer-term, retail funding over that of institutions or short-term funds. Continue reading
In 2008, as the US economy began its historic slide into the Great Recession, one solution to bolster the sagging economy was the Federal Reserve’s quantitative easing (QE) program. Each month, the Fed would purchase bonds such as Treasuries and mortgage-backed securities that banks were eager to dump. The Fed brought this debt onto its own balance sheets, freeing investors to purchase other securities such as stocks that would continue to move money through the financial system. This action was unprecedented in US history and meant to be a temporary fix. As the economy began to warm, speculation grew that the Fed would begin to taper the amount of bonds they bought every month. In the spring of 2013, the Fed announced that it would likely start that process by year end. Markets reacted with volatility, and emerging markets suffered quite a bit. Emerging markets depend greatly on US interest rates, which would rise with the end of QE. In September, markets steeled themselves for the start of tapering, but were surprised as the Fed again delayed ending the program. Finally in December 2013, the Fed announced that tapering would begin. Coupled with the news that Janet Yellen would replace Ben Bernanke as Fed chair, it was a bit surprising that the markets seemed to take it in stride after so much turmoil over the course of the previous year. Continue reading
The landscape for investors rapidly changed over the past few years. Volatility has reigned in the markets since the crisis of 2008. Traditional investment methodology, such as investing in a portfolio of blue chip stocks, may no longer prove successful. The speed at which technology increases the flow of information across the capital markets increases the likelihood of market volatility. These “flash” crashes and other irrational market behavior are not based on valuation but rather on the reaction of markets to information, positive or negative. The bond market has been also been challenged by the environment of low interest rates for some years. Bonds were once viewed as a possible haven for capital stability and reasonable income. The forecast for interest rates remaining low challenges the bond investor to seek acceptable income and puts a cloud over existing fixed income investments if interest rates do rise.
Traditional solutions to volatility would include diversified portfolios, but even this method has its drawbacks. As markets are becoming more highly correlated, the benefits of diversification, which depend on lower correlation, begin to fade.
So what is an investor to do in this brave new world?
Investors and managers are shifting their focus toward managing volatility rather than generating alpha in portfolios. Typical goals for investing include keeping up with inflation, stabilizing wealth, and achieving a reasonable return commensurate with risk. Many investors are taking a closer look at alternatives such as real asset, tactical, and long/short strategies. Quantitative or rules-based strategies have been viewed by some as a means to counteract the irrationality of markets. Advanced algorithms in these models may be better able to identify trends in price movements and complement the traditional qualitative process.
Investors will be looking beyond the traditional buy and hold methods of the past as they navigate the choppy waters of investing going forward. Whether it’s the tech bubble in the late 1990s or the real estate-led crash in 2008, we are constantly reminded of the necessity to set reasonable expectations and to take an active role in the protection and growth of personal wealth.
Recently, we have been seeing a growing need for independent risk functions, an indicator that competition for investment and operations risk management as well as compliance talent is on the rise across the globe. It’s not surprising considering today’s environment. Continue reading