Multi-Asset Evolution in the 21 st Century

Transcription

1 Multi-Asset Evolution in the 21 st Century Jason R. Vaillancourt, CFA Co-Head of Global Asset Allocation Putnam Investments A new century, a new model After the tech bubble burst, the endowments outpaced the rest The difference was the Endowment Model separated alpha and beta Source: Do (Some) University Endowments Earn Alpha? Barber, B.M. and Guojun Wang, For use with Credem Group only.. 1

2 Chasing the Holy Grail Hedge Fund Industry AUM Alternatives provided the alpha and diversification investors sought Hedge funds and hedge fund replication grew rapidly SOURCE: Strategas Research Partners, BarclaysHedge 3 Hedge funds didn t diversify when needed During the next stress event in 2008, the correlation of alpha and beta spiked As a result, traditional 60/40 outpaced alternatives 4 Source: Aon Hewitt, DataStream For use with Credem Group only.. 2

3 Can alpha be replicated in cheap, liquid structures? Case studies showed that many hedge fund returns can be replicated, in low-cost, more liquid structures Differentiating alpha and beta became more complicated HEDGE FUND RESEARCHER HOW IS IT REPLICATED Merger Arbitrage Mark Mitchell (Harvard) Todd Pulvino (Kellogg) Created portfolio of all publicly announced M&A deals Naïve strategy: Long the target and short the acquirer This portfolio outperformed the CSFB Risk Arbitrage Index 5 years in a row (1994 to 1998) Strategy could be further simplified by simply going long a risk-free bond, and then selling uncovered put options on the S&P 500! 5 Distressed Securities Hedge Fund of Funds Bridgewater Associates Goldman Sachs Used a combination of corporate spreads and emergingmarket debt Portfolio had a 0.79 correlation with hedge fund Bridgewater has created other proxy portfolios that closely track the performance of other hedge fund strategies (see Demonstrated that hedge fund-of-funds returns could be largely replicated through exposures to a basket of inexpensive and tradable risk exposures Even Private Equity can be replicated Private Equity acts like levered equity High FCF yield Midcaps outperform net-of-fee Private Equity Levered High FCF Midcaps more than double net-of-fee Private Equity Net-of-Fee Private Equity Index = The Cambridge Associates LLC U.S. Private Equity Index is an end-to-end calculation based on data compiled from 1,199 U.S. private equity funds (buyout, growth equity, private equity energy and mezzanine funds), including fully liquidated partnerships, formed between 1986 and Pooled end-to-end return, net of fees, expenses, and carried interest. Historic quarterly returns are updated in each year-end report to adjust for changes in the index sample. Pre-Fee Private Equity Index = Pre-fee returns are calculated assuming the observed net-of-fee index series represents the return of a representative private equity fund that is at its high watermark throughout the sample, charging a 2% flat fee plus a 20% performance fee, with the flat fee payable each quarter, and performance fee payable on positive returns. Pre-fee returns on the aggregate private equity index are calculated to make comparisons to passively managed public equity portfolios. Total Market Return = Value weighted CRSP total stock market index Best FCF Yield, Q2, Q3, Q4, and Worst FCF Yield = Portfolios formed by sorting the universe into quintiles based sorted on trailing Free Cash-Flow to Enterprise Value at the start of every month. The universe consists of stocks held in the Russell Mid-Cap Value index excluding the Financials, Materials, and Utilities sectors. Portfolios are weighted using market capitalization weights. Portfolio returns are calculated monthly using one month total USD returns. Levered Best FCF Yield = A constant target portfolio leverage of 2.0x is applied to the Best FCF Yield portfolio. The cost to borrow is assumed to be the one-month U.S. Treasury bill yield. SOURCE: Putnam GAA Research, Compustat, Russell, Cambridge Assoc. Period: Jan 1990 Sep For use with Credem Group only.. 3

4 Fama and Thaler lead to Smart Beta and Risk Premia Improvements to CAPM and Behavioral Finance identify more premia The drive to isolate and get paid for these premia gave rise to Smart Beta and Risk Premia strategies 7 Smart Beta on the rise Source: Bloomberg, ishares 8 For use with Credem Group only.. 4

5 Smart Beta is nothing new Managers have been using these factors and anomalies for decades Now access to Smart Beta is more granular 9 Smart Beta vs. Risk Premia Smart Beta Capture factor risk or risks (in multi-factor portfolios) Long Only No Leverage High Correlation Complement to traditional active Rules based/quant driven High transparency Risk Premia Capture academic and behavioral premia across asset classes Long/Short Leverage Low/zero correlation Complement to hedge funds/alts Rules based/quant driven Premia are transparent, holdings are not 10 For use with Credem Group only.. 5

6 Risk Premia checks the box Systematically captures academic and behavioral risk premia across asset classes: Observable, Persistent, Investable, Transparent premia Typically equal risk contribution and targeted volatility (5%-15%) Value Momentum Carry Volatility Curve Quality Liquidity Equities Fixed Income Commodities Currencies 11 As usual, caveat emptor Five Commodity Carry strategies, scaled to the same volatility, yield vastly different results How a risk premia is defined and harvested can vary dramatically 12 A B C D E Return 0.5% 6.9% 3.4% 12.7% 4.8% Volatility 10.0% 10.0% 10.0% 10.0% 10.0% Sharpe Ratio SOURCE: Putnam Global Asset Allocation (monthly returns, 5 years ended 6/30/17) For use with Credem Group only.. 6

7 As usual, caveat emptor Five Fx Carry strategies, scaled to the same volatility, yield vastly different results Not all risk premia produce consistent, positive Sharpe ratios 13 A B C D E Return -0.9% 0.7% -2.7% -1.0% -0.6% Volatility 10.0% 10.0% 10.0% 10.0% 10.0% Sharpe Ratio SOURCE: Putnam Global Asset Allocation (monthly returns, 5 years ended 6/30/17) Making sense of the evolution From hedge funds to smart beta to risk premia there is value, when properly navigated Be thoughtful Solve for outcomes Don t just check the box Develop strategic partnerships with smart, transparent investors 14 For use with Credem Group only.. 7

8 Be thoughtful. Solve for outcomes. Don t check the box. Do strategies perform as expected in different environments? What outcomes can be achieved? Is having all strategies as good as having the right strategies? 15 This presentation contains the views of Putnam Investments as of the date on the cover. It is provided for informational purposes only, is not investment advice, and should not be relied on as such. The information presented in this report has been developed internally and/or obtained from sources believed to be reliable; however, Putnam Investments does not guarantee the accuracy, adequacy, or completeness of such information. Predictions, opinions, and other information contained in this presentation may no longer be true after the date indicated on the cover. Putnam Investments disclaims any obligation to provide any updates on the subject in the future. The information provided relates to Putnam Investments and its affiliates, which include The Putnam Advisory Company, LLC and Putnam Investments Limited. 16 For use with Credem Group only.. 8

9 17 For use with Credem Group only.. 9