A Performance-Challenged Year
With full-year numbers having come to light, people have been evaluating how they performed vs the market and their peer group in 2018. As a study by Morgan Stanley rightly puts it: “In 2018, all 17 major asset classes failed to beat inflation. In 2017, they all did”. We performed a study of the 20 largest asset allocation funds in the US, a group representing more than $800bn in AUM, which reveals a full 2018 performance of -7.58% after fees on average. The HFR Fund of Funds Comp index was down 3.92%. Our impartial systematic USD global asset allocation model ALPIMA MASTR was down 0.86% after fees and transaction costs.
Chart 1 - Full Year Performance Figures
Data source: ALPIMA, Bloomberg
ETF Asset Growth
Global ETF assets grew by $270bn in 2018 to $4.93trn, according to ETFGI. This growing and dynamic market is not a free for all, however. According to a Bloomberg report: “While the new ETF product pipeline is full, so is the ETF graveyard, where almost 1,000 products have been put to rest (or one in four launches)”.
Chart 2 – Global ETF & ETP Growth
Data source: etfgi.com
Renewed Focus On EM
2018 was a particularly bruising for year for Emerging Markets equities. It is interesting to see various clients considering increasing their focus on, and exposure to, EM equities in 2019 in the plausible hope that a pause in US rate hikes will help performance revert somewhat from last year’s trough. The charts below provide some background.
Charts 3 & 4 - EM equities vs S&P 500: 2018…
… and 2000-2018
Data source: ALPIMA, Bloomberg
Sustainable Investing Becoming Core
Sustainability is not a new topic, but it is gaining real traction. A consensus is emerging that sustainability is likely to evolve from thematic to “core” in the years ahead. When Blackrock’s Larry Fink says that "sustainable investing will be a core component for how everyone invests in the future -- We are only at the early stages", the market listens. Surely, this is something to look forward to in terms of corporate governance as more and more corporations take ESG seriously. The question for investors faced with increasing choice and information is how to best account for ESG considerations when investing. ESG-focused investment products and solutions will attract all the more assets if they deliver additional performance relative to standard indices. A careful, evidence-based approach will be required to discern signal from noise.
AI for Augmented Intelligence
AI is a classic case of overhyped, unevenly understood topic, whose short-term effects are overestimated and long-term effects likely underestimated. You know this when AI & Machine Learning “cheat sheets” are circulating on the blogosphere with all the notions and key terms one “should know” listed on a few pages. Anyone with a bit of investing experience would be excused to want to run away and focus on well-known market-tested techniques and research. But make no mistake, AI is here stay, if not to run the business, at least to help managers and advisors make decisions. Artificial Intelligence will increasingly help augment human intelligence. In the data-rarefied space of low-frequency portfolio construction, applications already range from portfolio selection to allocation, as AI far exceeds humans at repetitive tasks such as pattern recognition. This being said, AI is such a hot trend that special care is highly recommended to sort fact from fad and not mistake good old iterative loops for genuinely adaptive, self-learning algorithms that are proven to consistently outperform humans.
Digital Engagement Drives Sales
We are seeing growing confirmation that a dynamic digital interface and greater focus on evidence help not only to engage with clients, but also to grow sales, with more and more accounts of clients reporting winning new business thanks to our platform.
Steady Eddy In Turbulence
The unstoppable forces of digitisation, systematic investing and personalisation continue to shape the financial world amidst challenging markets and unprecedented geopolitical turbulence. When the dust settles, the result of these trends will become all the more apparent as people across the value chain realise that the way they look at markets and at investing have irreversibly changed. As Ralph Waldo Emerson said, “the mind, once stretched by a new idea, never returns to its original dimensions.”
A Great Man Departs – You Will Be Missed, Jack
The legendary pioneer of index investing Jack Bogle left us last week. He will be thoroughly missed. Thankfully, his formidable legacy continues with an ever-growing number of people determined to promote transparency and performance in finance.