A Closer Look at Equities in Your Portfolio (Domestic and ... · – Does this change in a low-return environment? • Tools available to reduce equity volatility • Equity style

The opinions expressed in this presentation are those of the speaker. The International Foundationdisclaims responsibility for views expressed and statements made by the program speakers.

A Closer Look at Equities in Your Portfolio (Domestic and International)

Russell D. KampManaging PartnerKamp Consulting Solutions, LLCNew York, New York

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Discussion Topics

• Appropriate domestic and Intl equity exposure– Does this change in a low-return environment?

• Tools available to reduce equity volatility• Equity style combinations to achieve efficient

risk/ reward tradeoffs• Equity investing thoughts

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Discussion Topics

What is the appropriate level of equity exposure?

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Asset Allocation—Equities

• Asset allocation is critical to a DB plan’s success• Historically, DB plans implemented a 60/40 mix• Plans today are more diversified, but still focused

on the ROA as the primary objective• We think that there may be another way to

approach asset allocation, and equity investing within this context

• Counter intuitive? Perhaps• The sustainability of DB plans may

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Asset Allocation—Equities

• Integral elements to design of the equity allocation – Plan’s funded ratio– Calculated ROA– Asset Exhaustion Test– Risk-free and risk bucket allocations

• Equity allocation as residual outcome to the process

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Discussion Topics

Does this change in a low return environment?

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Does a Low-Return Environment Impact the Equity Allocation

• It depends on your objective—However, we think not.• Asset allocation should be predicated on the funded

status of the DB plan: weaker funding = More risk and vice-versa

• The level of absolute return is not the issue—DB plans have a relative objective—It is their plan’s specific liabilities

• Liability growth can be negative, so a low, but positive, return in that environment could look stellar

• That said, the lower the expected return, the more a plan should emphasize yield/income

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Discussion Topics

What methods can you use to structure an equity portfolio?

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Risk Reducing Strategies

• Consistently rebalance the exposures– Large versus small– Growth versus value– U.S. versus non-U.S. and developed versus

emerging/frontier– Active versus Passive

• Equity overlays• Options over-writing products• Market neutral and long/short strategies• Low volatility equities and Smart beta?

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Discussion Topics

Is there a combination of equity styles that generates a more efficient

risk/reward tradeoff?

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Improving the Risk/Return Relationship

• Risk tolerance and timeframe are critical variables• Seek lower correlating assets x-beta• Risk return trade-off can occur within portfolios, too.More traditional approaches• Rebalance to take advantage of equity cycles• Private equity• Micro caps, as a proxy for private equity• Concentrated portfolios in the tails • Smart beta

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Improving the Risk/Return Relationship

Less Traditional Approaches—Use Leverage and DerivativesNo, they aren’t financial weapons of mass destruction, and excessive leverage didn’t cause the GFC, and short-selling isn’t un-American!• Appropriate when used to spread risk, not concentrate it!• Looking to improve the efficient frontier

– Convertible arbitrage– Managed Futures– Merger arbitrage– Risk-parity– 130-30 and market neutral (long/short)

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Discussion Topics

Random thoughts regarding equity investing

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Equity Investing

• Equity returns should reflect the fundamentals of the underlying businesses

• Since 1901, the U.S. stock market has generated a 6.5% return versus a 6.3% growth of earnings and dividends

• However, there are lengthy periods when this relationship becomes disconnected—See 1990s

• Does having a better earnings forecast carry the same predictive value as it once did?

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Equity Investing—What Do You Prefer?

• There exists a plethora of choices—Perhaps too many

• Beta still dominates return

• Cycles exist that can create value-added opportunities

• Less is definitely more• We’ve over-

complicated the process

International / Global

Emerging Markets

Smart Beta

Growth

Passive / Active

Concentrated or

Enhanced Index

Value

Large Cap

Systematic /

fundamental

Small Cap

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Random Thoughts—Active vs. Passive

• There is a role for both active and passive investments

• Portfolio construction biases lead to cycles favoring one versus the other

• These cycles can be anticipated—Be a contrarian

• Certain segments of the equity market are more appropriate for indexing

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Random Thoughts—Large vs. Small

• Is there a premium available to smallcap investors? Where’s the beef?

• Given poorer liquidity and smaller research coverage there should be

• However, R2000 has only outperformed the S&P 500 by 0.2% for the 20 years ending 10/16

• Why? Be wary of capacity and fees • Consider the S&P 600 instead of the R2000

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Random Thoughts (Continued)

Pay attention to fees• Transaction costs• Management fees—Use performance fees• Vehicle delivery differences in cost

Mutual Funds, ETFs, separate accounts, commingled funds

• Product capacity

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• Equity styles aren’t just about large vs. small and value vs. growth

• Low tracking error versus less constrained• Fundamental versus systematic (quant)• Concentrated versus diversified• Top-down versus bottom-up• Global• All Cap

Random Thoughts (Continued)

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Alternative Equity Strategies• Market Neutral/Long Short• 130/30 products• Portable AlphaIn many cases the risk/return objective was misunderstoodExpand the manager’s working universe through negative bets

Random Thoughts (Continued)

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62nd Annual Employee Benefits ConferenceNovember 13-16, 2016Orlando, Florida

Session #I11

A Closer Look at Equities in Your Portfolio (Domestic and International)

• The allocation of assets should be driven by your plan’s liabilities and funded status

• Equity allocations will be a function of a plan’s decision to allocate between risk-free and risk buckets

• Equity markets provide numerous cycles that can be managed (gamed?)

• Management of capacity, management fees and transaction costs are critical

• Fees remain high—Performance fees should be preferred

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2017 Educational ProgramsInvestments

63rd Annual Employee Benefits Conference October 22-25, 2017 Las Vegas, Nevadawww.ifebp.org/usannual

Investments InstituteMarch 13-15, 2017 Phoenix, Arizonawww.ifebp.org/investments

Portfolio Concepts and ManagementMay 1-4, 2017 Philadelphia, Pennsylvaniawww.ifebp.org/wharton

Related ReadingVisit one of the on-site Bookstore locations or see www.ifebp.org/bookstore for more books.

The Tools & Techniques of Investment Planning, 3rd EditionItem #9029www.ifebp.org/books.asp?9029

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