Alan McKnight, the director of global investment strategy at Balentine, said taking on currency exposure adds the risk that movements in the currency can influence the overall value of the asset regardless of the underlying characteristics of the asset.
Progress in the European debt crisis and better US economic data over the last three months have led to significantly less market volatility. As risks to the near-term outlook have abated, momentum in global equity markets has accelerated. Based on the long-term attribution of our returns, such an environment typically provides a compelling backdrop for us to harness the power of our quantitative models, because during such “normal” market environments, underlying asset class performance trends persist for longer.
Balentine employs an “Art and Science” approach to investment management. Within this approach, Science, a term that describes our highly objective investment decisions based on our scientific models, determines our strategic neutral position given today’s starting point. Our annual Capital Markets Forecasts are used to determine that strategic neutral position and the investment course we chart.
2011 was filled with many ups and downs – with issues ranging from natural disasters to politically-created ones affecting markets. In this three part series, we will look back at some of the biggest factors that affected the economy and examine their potential impact going forward. In Part One of this series, David Damiani, Director of Risk Management, discusses Balentine’s risk-first approach to investing and the benefits of approaching investments in this way.
In our Market Notebook, we often share information when we make policy changes, explaining the What (the allocation change), the When and the Why (the reasons behind the rebalance), but we have never explained the How: the behind the scenes mechanics that go into an allocation change. Though Balentine is not a Broker Dealer, each time a policy change is enacted, portfolio implementation considerations play a central role. Implementation is one of the key components of investment management and though often overlooked or misunderstood, implementation has important implications for our clients’ portfolios.
A few weeks ago, the world’s markets began to adjust due to a significantly higher probability that there would be a global recession over the coming year. Stocks are down more than 15%, the yield on the 10-year Treasury bond has fallen below 2.5%, Europe is in trouble and Gold is at record levels. After the markets closed on Friday, August 5, Standard & Poor’s (S&P) downgraded U.S. debt, saying that our elected officials’ failure to agree upon steps to reduce spending and pay down debt caused the U.S. to lose its coveted AAA rating. Should we be worried? Well, yes and no.
If you’re lucky enough to win the Powerball lottery, you will have to decide if you’ll collect the prize money in one lump sum or in uniform payments over time. You have to choose between a smaller guaranteed payout and a potentially larger, but less certain, outcome. Many pension fund managers face a similar quandary when assessing how to invest portfolio assets: accept certain payoffs in the future for known costs today, or risk a potential shortfall tomorrow for less cost today.
Volatility, both experienced and expected, is but one consideration when evaluating an investment decision. Traditional investment advisors have tended to build portfolios around the potential returns available from asset classes. This approach overlooks the risk side of the equation. At Balentine we have categorized investments by a multitude of risk factors, liquidity, active vs. passive, and income potential; this is the building block approach to portfolio design. The idea is to establish the risk parameters first and then construct a set of investments that provide the greatest reward for the risks borne.
Adrian Cronje, Balentine’s Chief Investment Officer, recently talked with Michelle Bova from FactSet about the failures of traditional asset management following the financial crisis of 2007.
Risk is a component of almost every aspect of human life. In some situations, risks are relatively minor and have potentially little impact. In other, more serious situations, risk can pose dangers to life and livelihood.