Tag Archives: earnings-center

Allianz Makes The Case For Alternative Investments

By DailyAlts Staff With interest rates at rock-bottom lows, the three-decade bull market in bonds is clearly in its last days. Meanwhile, stock markets from Asia to the Americas are undergoing various bouts of volatility, and valuations remain stretched, indicating recent bearishness may be far from over. These factors, along with the diverging policies of world central banks, are causing investors in traditional assets to rethink their allocation strategies. Allianz Global Investors makes “The Case for Alternatives” in the latest edition of the firm’s Analysis & Trends white paper series. Financial Repression Financial repression occurs when real interest rates are negative. In this way, savers can’t grow their wealth merely “risk-free,” and thus they’re forced to choose between losing ground to inflation or investing in riskier assets. Typically, financial repression has been the result of inflation outpacing the nominal interest rates on government bonds. But due to unprecedented monetary experiments, most European nations now have negative nominal yields on their sovereign debt. This isn’t something traditional “60/40” investors ever bargained for. (click to enlarge) Obviously, bond investors need to look elsewhere for income when they’re faced with negative nominal yields. According to Allianz, this has resulted in the growing popularity of “low-risk, low-return” alternative strategies to replace the role that bonds once played in investors’ portfolios. Monetary Consequences The negative yields on European bonds are a direct consequence of the European Central Bank’s policy of “quantitative easing” – i.e., buying bonds with newly minted money. When the central bank expands the money supply to buy bonds, it bids down interest rates. This not only props up the bond market, it also lowers the risk-free rate of return, thereby encouraging investors into riskier assets – like stocks. This is why Allianz says “ongoing expansionary monetary policy globally” should “support risky assets longer-term” – but in the meantime, “investors should be prepared for increasing volatility.” The Alternatives Universe Allianz GI points out that “alternatives” are not an asset class of their own, but a “universe” of investments that includes all of the following (and more): Commodities Currencies Real assets (timberland, fine wine, art) Intangible assets (patents, royalty streams) Private equity Alternative strategies The graphic below plots a variety of alternatives on two axes: The up/down axis considers liquidity from the perspective of the investor and the investment vehicle, while the left/right axis considers liquidity in terms of the underlying assets. For example, ’40 Act long/short equity funds are liquid from the perspective of the investor, and also in terms of their underlying assets. But while publicly traded REITs are just as liquid from the investor’s perspective (or nearly so), their underlying assets are far less liquid. Choosing the Right Alternatives Alternatives should be attractive to investors who realize the traditional “60/40” stock/bond diversification is unlikely to provide its traditional benefits going forward. Bonds are set to lose ground as interest rates rise, and stocks, which had been pumped up by monetary accommodation, are likely to come under increasing pressure, too. Whereas the income from bonds used to provide a cushion for “60/40” portfolios, even during bear markets, the ultra-low yields on U.S. and especially European bonds won’t have that effect in the immediate future. The question, then, is which alts should investors consider? According to Allianz, investors have two choices: Allocate broadly to alternatives via a custom advisory service; or Add single alternative strategies in order to achieve a specific investment objective. Allianz breaks down the alternative strategies pursued by hedge funds into four broad classes: Event driven, relative value, macro, and long/short equity. Given each strategy is designed to provide returns with limited correlation to the broad markets, and the broad markets have been bullish for years, the coming volatility and presumed end of long-time bull markets in stocks and bonds should result in a positive environment for many alternative strategies. For more information, download a pdf copy of the white paper .

Quant Investing: Improving The Value Of Shareholder Yield

Part of quant investing is always being on the look out for better metrics and systems that enhance performance. Today I want to look at a simple improvement to the value metric shareholder yield. I’ll look at this in the context of the quant index replication strategy I posted on here . First, lets look at shareholder yield in more detail. Recently there has been some interesting discussion on the level of buybacks, as a percentage of market cap, and how strong a conviction by management that represents. The idea being that the higher percentage of shares a company is buying back, the more conviction management has on the value of the company, and thus leading to better stock performance. The best analysis of the topic is here . The analysis going back to 1987 shows two key things; the largest buybacks (greater than 5% of market cap) are done at cheaper valuations and this leads to better performance over the following year. The large stock shareholder yield quant value strategy is a big improvement on the traditional indices. But maybe we can do better armed with this new information on the level of buybacks. I’ll take the original large stock SHY value strategy and compare it to a new version which only buys the large cap stocks sorted by SHY if the buyback yield is greater than 5%. We’ll go back to Jan 1999 and run the backtest through yesterday’s market close. First, the performance for the original large stock SHY strategy. Pretty darn good, 16.44% per year since 1999 with a Sharpe of 0.75 and Sortino of 1.06. Now lets add the filter that only buys stocks with a buyback yield greater than 5%. Even better as the research suggested. 17.59% per year since 1999 with a Sharpe of 0.80 and a Sortino of 1.17. That a 1.1% per year return enhancement with an improvement in risk adjusted returns as well for a very simple addition to an already powerful strategy. In short, screening for high conviction buybacks is a powerful addition to a large cap shareholder yield value strategy.

Surfing The Market Waves: The Nested Pullback

Patterns are important in trading; you might even say that trading is basically a game of recognizing the right patterns and doing the right thing when they happen. Most of you who have read my blog or my book, or have seen the research I write every day, know that I focus heavily on trading pullbacks in most market environments – pullbacks in trends, after breakouts, before breakouts, at the end of trends, at turning points in trends – even a simple pattern offers many ways to trade the market’s action. One of the more useful variations of the pullback theme is something I have called a “nested pullback.” As always, terminology can be confusing, so it’s important to realize that the “nested” part of the term means that the nested pullback is a smaller structure that is “nested” within the larger pullback’s drive to resolution. It is not nested within the larger pullback itself, but, rather, within the thrust that happens when the bigger pullback begins to turn into another trend leg. Another way to think about it is that it is a pause: the bigger pullback starts to go into another trend leg, and that move stalls into a small consolidation which is the nested pullback. (I wrote a longer post about a year ago here .) Take a look at this recent example in natural gas futures: Nested pullback in natural gas. Identifying the bigger pullback was easy if you were able to let go of preconceptions, concerns about sentiment/COT data, and other nonsense that always encourages us to fade trends. So many times, the right thing to do is to simply align ourselves with the dominant group in the market until the market makes it clear that something has changed. The market is in a downtrend so we want to short bear flags – that sentence is the essence of one pretty successful trading plan. The nested pullback provided additional confirmation. We obviously would prefer if every trade would move immediately and cleanly to its target, but things don’t often work like that. It’s more common for a move to stall or pause, but we can then often find additional information in the character of that pause. In this case, the nested pullback showed that there was a good probability that this market would break lower. (For instance, a pause that had a lot of sharp rallies would be more likely to suggest that factors were beginning to align against the trade.) This is a good pattern to add to your toolkit because it can do at least three things for you: 1) it gives you some insight into how to manage the trade and how to tighten stops, 2) it can provide a secondary entry if you miss the initial spot to get into the trade, and 3) it can be a good spot to add, if you do that within your trading plan. Spend some time looking for this pattern and see if it can enhance the way you view market trends. I’m very suspicious of “after the fact” analysis, and you should be too. Anyone can find any pattern on an old chart, but this is another example that we identified in real time: I signaled the initial short to my research clients and identified the nested pullback as it was developing. We took partial profits into the decline, and are still short for today’s meltdown. Obviously, not every trade works like this, but this is a clean example of the pattern, and a good example to commit to memory.