- January 22, 2016
- Posted by: IAIP
- Category:BLOG, India Investment Conference, Mumbai
Moderated by: Navneet Munot, CFA, Director, IAIP and CIO, SBIMF
Contributed by: Subash Iyer, CFA, Member, IAIP and Analyst CRISIL
Bob began his session by highlighting the importance of timing in the capital markets, citing the example of the hedge fund Long-Term Capital Management (LTCM) which collapsed in the late 90s following the 1997 Asian and 1998 Russian financial crisis. Although LTCM’s bet on the Russian government bond did play out over the next decade, LTCM did not survive long enough to bear the fruits.
He then clearly explained Northern Trust’s investment philosophy which are guided by two distinct committees namely the Capital market Assumptions committee (CMA) and Tactical Asset Allocation committee (TAC). The CMA has a long term outlook on the markets, typically 5 years and updates its strategy annually while the TAC has a short term outlook on the market, typically 1 year, and updates its strategy on a weekly/monthly basis. The idea behind two teams is to combine long term discipline with short term flexibility to provide downside protection and upside participation.
Through a series of charts Bob highlighted the importance of staying invested for the long term, as majority of the returns in the equity markets were captured in only 10% of trading days. He also felt that the benefits of diversification, especially country diversification were overstated as one has to also have the ability to access geopolitical risks, currency risks along with usual business and financial risks. To further establish the same Bob exhibited the 10 year US denominated index returns for various countries. Surprisingly only two emerging markets namely India and China figured in the top 5 countries dispelling the notion that emerging markets yield better returns than developed countries such as USA, Australia.
He believed that one must deep dive into getting the valuation right as that is the most consequential betting error most investors make. He was also honest enough to admit that Northern Trust in 2015 failed to get its US earnings forecast right however it was saved by the uptick in trading multiples.
In conclusion Northern trust’s long term views were that global growth would continue be remain low due to the deleveraging process and demographic issues. Asset class with lower exposure to Equity would do well. For 2016 Northern Trust recommends over weighting US assets. Within US asset class, Northern Trust recommends increasing exposure of US high yield bonds, US equities and reducing exposure of US investment grade bonds.
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