It has been a tough Year to make Money

2018 has been a tough year in which to make money.

2018 is “The worst time to make money in the markets since 1972” according to a recent Bloomberg article.

“Things have not been this bad since Richard Nixon’s presidency”.

Research undertake by Ned Davis Research, who places markets into eight big asset classes, everything from bonds (Fixed Interest) to US and international stocks and commodities, not one of them is “on track to post a return this year of more than 5%, a phenomenon last observed in 1972”….

As they note, in terms of absolute loses, think Global Financial Crisis (GFC 2007/08), investors have incurred far worst returns in 2018, nevertheless, as far as breadth of asset classes failing to deliver upside returns, “2018 is starting to look historic.”

Nothing has worked this year.  Year to date: global equities are down, as are emerging markets, hedge fund indices, global commodities (even oil), International Credit, Global High Yield, US Fixed Interest, US Inflation Protected Bonds, while Global Aggregate Fixed Interest have eked out a small gain.  Investments into unlisted assets have been more rewarding.


“That’s all but unique in history. Normally when something falls, something else gains. Amid the financial catastrophe of 2008, Treasuries rallied (increased in value). In 1974, commodities were a bright spot. In 2002, it was REITs. In 2018, there’s nowhere to run.”


Outcomes are a little better if you are a New Zealand (NZ) based investor, Cash is on track to return around 2%, 6 month Term Deposits 3.5%, NZ Fixed Interest is up around 4%, and the NZ Sharemarket is currently up 3%.  Still they are all short of 5%.  Meanwhile the recent strength in the NZ dollar has detracted from offshore returns.


It has been a tough year, global equities reached all-time highs in January, fell heavily in February and March, only to recover up to October, with the US Sharemarket reaching a new historical high.

Since October yearly gains have been erased due to a number of factors, some, but not all, of these factors are briefly outlined below.


In short, as highlighted by a recent Barron’s article markets appear to be panicking over everything.

Recent market drivers in brief:

  • Primarily concern for Sharemarkets has been a reduction in global economic growth expectations. Global investor sentiment toward the pace of global economic growth in 2019 has become more cautious over recent months. Global sharemarkets have adjusted accordingly. Albeit, the sharmarket adjustment does appear to be overdone relative to the likely moderating in global growth in 2019, which has also  largely been anticipated.
  • Global Trade concerns continue to negatively impact global markets e.g. Australia and commodities, primarily the ongoing negotiations between the US and China are a source of market volatility and uncertainty.
  • Brexit more recently. The UK are going to have to pay a price for leaving the EU, why? too stop other countries ever considering leaving the EU as a viable option. Unfortunately, while Brexit is an important issue and will be a source of volatility, the negative consequences will largely sit with the UK rather than the rest of the world.
  • There has been considerable oil price volatility, the price of oil fell by over 20% in November.
  • There has also been uncertainty as to likely pace of increases in the Federal Funds Rate by the US Federal Reserve (US Central Bank).


Inverted Yield Curve

Lastly, markets have also latched onto the inversion of the US Yield curve.

Inversion is when the yield (rate of interest) is lower on longer dated fixed interest securities compared to shorter dated securities. Under normal circumstance longer dated securities have a higher yield than shorter dated securities.

An “inverted” yield curve has been useful, though not perfect, in predicting economic recession and equity bear markets (when sharemarkets fall in value of over 20%),


On this occasion the market has focused on the three year security versus the five year security.

Normally, the market focuses on the three month versus the 10 year security as the best predictor of economic recession.  For a further discussion see Risk of Economic Recession and Inverted Yield Curve and US Recession warning. An inverted yield curve is a necessary but not sufficient condition in predicting a recession, and there is often a lag.


As the Barron article highlights: “Since 1965, the three-year yield has been higher than the five-year on seven different occasions. In 1973, the stock market had already sunk into a recession. In the other six instances, the median distance to a recession was 25 months—or more than two years. The S&P 500 went on to gain a median 20% over the 24 months following such an inversion. “Historically, not only have returns tended to be very strong, but the bear market has generally been years away,”


Happy investing.



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Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.


Why Low-Cost Index Investing Is Not Necessarily Low Risk

The US equity market has become more concentrated and not for the first time in history.

Current market concentration has been compared to 1999.

The market observations in this short article are consistent with the recently published Research by Research Affiliates, which I covered in a recent post, Buy High and Sell Low with Index Funds.


Happy investing.


Global Investment Ideas from New Zealand. Building more Robust Investment Portfolios.


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Adding Alternatives to an Investment Portfolio – Part 2

Following on from an earlier post on adding alternatives to a portfolio the attached document is a short and precise commentary on the case for adding alternatives to a traditional portfolio.  See link below.

The Title: “It’s an evolution, not a revolution” sums it up very well.

The article notes that the evolution in portfolio construction has moved away from the old way of style boxes, market expectations, and benchmarks, to a greater focus on the investors (clients) liabilities, risk tolerances, and an investors actual objectives – most likely funding requirements in retirement.

The article references the behavioural finance that people “feel the pain of losses far more they do the benefits of gains”. As they say, Investors want to minimise loses, and focus on outcomes rather than returns.

The article is then nicely concluded referencing one of Warren Buffet’s key influences, Benjamin Graham, quote “the essence of investment management is the management of risks, not the management of returns.”  This is so true.

I agree with their concluding remark, “better to lose less and compound more than to reach for excess returns and fail to reach your objectives”. Alternative strategies can play an important role in compounding returns / wealth over time.

P.S. This article is an editorial that appeared in the Chief Investment Officer magazine.

Evolution not revolution


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Adding Alternatives to an investment portfolio

I first read this article (PDF below) in 2015 when it was published.

I particularly liked their comment as viewing “alternative strategies as part of the ongoing evolution in portfolio construction”.

Hopefully many portfolios have evolved to include an allocation to alternatives, whether non-traditional assets or alternative strategies as characterised in the article.

This article also touches on the theme from my last post about true portfolio diversification “an attempt to push beyond simple diversification in which investors’ funds are divided among multiple assets or asset classes.” i.e. the introduction of the likes Listed Property and Infrastructure into a multi asset class portfolio does not bring “true portfolio diversification” and will more than likely fall short of expectations with respects to the portfolio diversification benefits.

The article’s focus on downside protection is right, and lowering portfolio volatility overall. A Portfolio with lower volatility and a similar return compared to a higher volatile portfolio will produce more wealth over time.

Their framework can also be placed into a Liability Driven Investing (LDI) framework outlined in my earlier posts. In my mind the right “combination of growth and protection” is equal to the right combination of a return seeking portfolio and a liability hedging portfolio as outlined in my earlier posts.

Lastly, if the economic / market case for alternatives was strong in 2015, it must be even stronger in 2018, particularly given many Alternative strategies are more easily accessible, transparent and fee competitive. A number of Alternative ETFs are also appearing. (Not that I am keen on providing market forecasts – more on this in later posts).

Should Liquid Alternatives Be Part of the Core Allocation


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Portfolio Diversification

2018 is shaping up to be a tougher year for portfolios compared to 2017. Albeit the year has started well.

Longer term we appear to be entering a low return environment. This creates some challenges for the industry and investment portfolios.

This article articulates these challenges well and expands the discussion into the potential role Alternative Investment Strategies could play in an investment portfolio.

Amongst the good points the article makes, a couple stand out for me:

  • Focus on the risks in the portfolio (which is not necessarily the categories of the assets)
  • We are at the mercy of what markets deliver in terms of return; that cannot be controlled. BUT, risk can and must be managed to the level consistent with the investment goals.


With regards to Alternative Investment Strategies, as the article says, they must receive serious considerations.

Alternative strategies sometimes offer the way to gain true portfolio diversification and reduce the dominance of listed equity investments within a portfolio.

I mean “true portfolio diversification”. This is harder to attain than is often claimed. For example the addition of listed property and listed infrastructure into a multi-asset class portfolio offers limited diversification benefits. They are after all sectors of the broader listed equity market, which the multi-asset class portfolio will likely have exposure to. These equity sectors will largely behave like the rest of the broader equity allocation, particularly at times of financial market stress. Thereby offering no true diversification benefit. They may diversify your “equity” exposure, but provide limited diversification to a multi-asset portfolio. Listed Property and listed Alternatives are not alternative investments or strategies, they are equities.

I have witnessed in the last year Portfolio’s “diversified” out of the broader equity market and into list property and infrastructure as a means to enhance portfolio yield and diversify the portfolio. Never chase yield. The performance difference between the broader equity market and listed property and infrastructure is 10-12% over the last 12 months. Thereby a very costly result in an effort to “diversify” the portfolio. The diversification benefits of which will also disappoint over time.

These actions reflect a poor approach to portfolio construction and portfolio risk management, particularly relative to a set of future liabilities and investment goals.



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More on Liability Driven Investing (LDI) for beginners

Developing on the themes of early blogs, Industrial Revolution in Money Management and Liability Driven Investing for Beginners.

This article builds on both of these themes. Particularly the article observes:

“Hence recent focus on liability-driven investment (LDI) strategies, otherwise known as asset-liability management (ALM). More complete and holistic than MPT, LDI explicitly includes an investor’s current and future liabilities.”

MPT = Modern Portfolio Theory, which is the traditional way of building portfolios, focussed more on risk tolerance and return expectations, than investment goals.

The inference is that investors should be focusing more on goals e.g. retirement spending, children’s education, and inheritance, which can be seen as future liabilities that need to be met.

The article notes:

“Nevertheless, there is a growing consensus in the wholesale capital markets that LDI creates better portfolios, particularly when it comes to retirement needs.”

This will likely be in the form of more advanced Goal Orientated Investment solutions for investors. A more robust portfolio will be obtained, one that focuses on the key risks of meeting Investment Objectives.

Obviously most financial planning processes take into consideration investment goals. Nevertheless, LDI makes investment goals the central piece. With LDI portfolio allocation and management of risks is relative to meeting goals and a more customised investment solution is developed.

Under the LDI model there are two portfolios: the liability portfolio and a return seeking portfolio. Most investment products offered today are return seeking portfolios with some dampening down of risk (measured by volatility i.e. how frequently and the degree to which the portfolio goes up and down) so as to fit ones level of risk tolerance.


Lastly, they note:

“The popular MPT framework of expected value optimization given a risk constraint is ripe for disruption. Digital asset management or robo-advice can help distribute LDI technology to the mass market, and we can expect the industry to move in this direction.”

This is consistent with the EDHEC Insights article in the JOIM (EDHEC-Whitepaper-JOIM)– Mass Customization versus Mass Production – How an industrial revolution is about to take place in Money Management and why it involves a shift from Investment Produces to Investment Solutions (Lionel Martellini)


The digital element is likely to be the revolution, LDI type strategies the evolution. Perhaps this is the Uber moment, or AirBnB moment, for the Funds Management Industry. Certainly not the Uber moment of the Funds Management is the offering of cheaper multi-asset class investment products that cannot be differentiated from any other like for like investment products in the market.


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My heroes and a bit about New Zealand

Dick Quax was a hero of mine when growing up. I wish him all the best.

Quax, (John) Walker, and (Rod) Dixon were amongst my boyhood heroes. The book, Kiwis Can Fly, is a great read of the courage, focus, and drive these guys had. (For off-shore readers, a Kiwi is a flightless New Zealand bird and a national symbol. People from New Zealand are affectionately called Kiwis. The New Zealand dollar is also referred to as the Kiwi.)

Of course Quax, Walker, and Dixon stood on the shoulders of giants, Peter Snell and Jack Lovelock, continuing New Zealand’s great middle and longer distance running tradition.

Special mentioned should be made of Arthur Lydiard, revolutionary coach and mentor. Where ever he went in the world athletic success soon followed.


Arthur, influenced a great person who had a big impact on my life who I wish to pay tribute to, Alistair McMurran, who sadly passed away recently. 


Liability Driven Investing (LDI) for Beginners

As outlined in my first blog liability-driven investing (LDI) will play a critical role in the future as investment approaches continues to evolve.

The expectations are that LDI will increasingly be used for individual investors in the emergence of goal-based investment solutions.

LDI is widely used by institutional investors, such as insurance companies, Pension providers, and Endowments.

The attached document provides a definition and explanation for Asset/Liability Matching investing, which is essentially LDI.


I hope you find it useful.


Asset Liability Matching for Beginners


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Robust Investment Portfolios

Happy New Year

As the New Year begins, a year that is likely to be a bit tougher than the last, it is good to reflect that the right investment focus is being maintained.

Most of the discussion within the Investment Industry is on the inconsequential and often to short term in focus.

I have had the honour of managing and determining the investment strategy for a large Australasian insurer.

There is lot to learn from managing insurance portfolios, not the least focusing on the right investment goals, understanding risks and the level of tolerance for risk, appropriately benchmarking what success looks like, and taking a longer term perspective.

These issues are well articulated in this article.

Build robust investment portfolios. As Warren Buffet has said: “Predicting rain doesn’t count. Building arks does.”

Therefore, make sure your investment portfolio is an all-weather portfolio and the ongoing debate and focus is always on the consequential.


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