No place to hide from the financial turmoil
Diversifying risks and returns during the global financial crisis is one of the biggest concerns for investors.
AsianInvestor held its 'Fund Management in Flux: Finding the Path Forward for Asian Asset Management' conference yesterday, which was attended by around 150 fund managers, institutional investors, distributors, service providers and lawyers.
The one-day event was the brainchild of our conference director, Christopher Petersen, who thought it would be a good idea to get the asset management players together and give them a venue to exchange ideas about where the industry stands and where it is headed.
At the start of the conference, Petersen lightheartedly referred to the event as ôgroup therapy for the asset management industryö. By the end of the day, it did prove to be cathartic for many of the participants.
One key discussion point at the conference was diversification during these volatile times. The general feeling among the speakers at the conference was that there has been ôno place to hideö amid the global financial turmoil. Aside from cash, that is.
ôIn a year like this, the only real diversification would have been to be 100% in cash,ö says Vincent Duhamel, CEO of Sail Advisors.
Indeed, "cash is king" was a key catch phrase of the day, reflecting the general sentiment in the market over the past year.
Khiem Do, chair of the multi-asset group of Baring Asset Management, notes true diversification within equities is nearly non-existent at the moment.
ôRegrettably when there is deleveraging or forced selling by leveraged investors of mutual funds looking for the exit door, the correlation becomes one or higher than one,ö says Do. ôIn the months of September and October, the diversification among equity markets completely disappeared because when investors decided to rescue equities in favour of bonds or cash, then they just sold en masse.ö
Both Duhamel and Do believe, however, that diversification should hold up in the longer term.
ôThe big question for everyone in this room is determining when that unwinding of leverage will finish,ö Do says.
The only asset classes that have produced positive returns have been the Japanese yen and bonds, Do says.
ôOver the last six weeks, if you owned a 30-year bond then you would have picked up a lot of returns,ö he says. ôHowever, my hypothesis is if you buy a 10-year US bond you might regret it in a big way in the next two years.ö
The value of long-term bonds declines rapidly in a period of high inflation, which was the case following an oil crisis in the 1970s, says Chris Ryan, managing director for Asia ex-Japan and Australia at Fidelity International.
David Russell, head of client sales management for financial institutions and head of investors for global transactions services at Citi, says he hasnÆt seen a huge demand for cash just yet, but the interest for the asset class is unprecedented.
ôWe have received questions from our clients asking what do we do with cash, where cash is held, and whether there are more efficient ways to hold cash. Cash is pretty much held in the balance sheet of banks so you are taking a bank risk. Cash is by no means risk-averse,ö says Russell. ôThis is the first time I have encountered questions about what to do with cash and the questions are from across the board û central banks, sovereign wealth funds to fund houses.ö
Naomi Denning, head of investment consulting at Watson Wyatt, says there are still plenty of opportunities for long-term investors to build diversity.
At the moment, portfolios have a tendency to be concentrated in the equity risk premium in the form of market-cap, beta prime, long-short equity, absolute return equity, and private equity investments, Denning says.
There has been some exposure to credit risk premium in the form of corporate bonds, high yield or emerging market debt, convertibles, secured loans, and credit default swaps or collateralised debt obligations, she adds.
Exposure to illiquidity premium (through property and infrastructure), skill premium (through traditional active management, hedge funds, currency and equity-market neutral) and insurance premium (through commodities, catastrophe bonds and weather derivatives) have been minimal, she says.
A typical portfolio, Denning notes, has a 78% allocation to equities, which is fairly skewed and one that is highly susceptible to breakdowns in stock markets, as we have seen during the financial turmoil.
The one-day event was the brainchild of our conference director, Christopher Petersen, who thought it would be a good idea to get the asset management players together and give them a venue to exchange ideas about where the industry stands and where it is headed.
At the start of the conference, Petersen lightheartedly referred to the event as ôgroup therapy for the asset management industryö. By the end of the day, it did prove to be cathartic for many of the participants.
One key discussion point at the conference was diversification during these volatile times. The general feeling among the speakers at the conference was that there has been ôno place to hideö amid the global financial turmoil. Aside from cash, that is.
ôIn a year like this, the only real diversification would have been to be 100% in cash,ö says Vincent Duhamel, CEO of Sail Advisors.
Indeed, "cash is king" was a key catch phrase of the day, reflecting the general sentiment in the market over the past year.
Khiem Do, chair of the multi-asset group of Baring Asset Management, notes true diversification within equities is nearly non-existent at the moment.
ôRegrettably when there is deleveraging or forced selling by leveraged investors of mutual funds looking for the exit door, the correlation becomes one or higher than one,ö says Do. ôIn the months of September and October, the diversification among equity markets completely disappeared because when investors decided to rescue equities in favour of bonds or cash, then they just sold en masse.ö
Both Duhamel and Do believe, however, that diversification should hold up in the longer term.
ôThe big question for everyone in this room is determining when that unwinding of leverage will finish,ö Do says.
The only asset classes that have produced positive returns have been the Japanese yen and bonds, Do says.
ôOver the last six weeks, if you owned a 30-year bond then you would have picked up a lot of returns,ö he says. ôHowever, my hypothesis is if you buy a 10-year US bond you might regret it in a big way in the next two years.ö
The value of long-term bonds declines rapidly in a period of high inflation, which was the case following an oil crisis in the 1970s, says Chris Ryan, managing director for Asia ex-Japan and Australia at Fidelity International.
David Russell, head of client sales management for financial institutions and head of investors for global transactions services at Citi, says he hasnÆt seen a huge demand for cash just yet, but the interest for the asset class is unprecedented.
ôWe have received questions from our clients asking what do we do with cash, where cash is held, and whether there are more efficient ways to hold cash. Cash is pretty much held in the balance sheet of banks so you are taking a bank risk. Cash is by no means risk-averse,ö says Russell. ôThis is the first time I have encountered questions about what to do with cash and the questions are from across the board û central banks, sovereign wealth funds to fund houses.ö
Naomi Denning, head of investment consulting at Watson Wyatt, says there are still plenty of opportunities for long-term investors to build diversity.
At the moment, portfolios have a tendency to be concentrated in the equity risk premium in the form of market-cap, beta prime, long-short equity, absolute return equity, and private equity investments, Denning says.
There has been some exposure to credit risk premium in the form of corporate bonds, high yield or emerging market debt, convertibles, secured loans, and credit default swaps or collateralised debt obligations, she adds.
Exposure to illiquidity premium (through property and infrastructure), skill premium (through traditional active management, hedge funds, currency and equity-market neutral) and insurance premium (through commodities, catastrophe bonds and weather derivatives) have been minimal, she says.
A typical portfolio, Denning notes, has a 78% allocation to equities, which is fairly skewed and one that is highly susceptible to breakdowns in stock markets, as we have seen during the financial turmoil.
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