Robert G. Smith III

Closet Benchmarking Among UK Equity Funds? In the ever-evolving landscape of UK equity funds, it’s important to identify which funds are truly active versus those more aligned with the benchmark. Our latest research, visualized in the scatter chart below, sheds light on where funds fall on this spectrum, with the X-axis showing stock active share and the Y-axis displaying a blend of country and industry-level active share, compared to the FTSE All Share index. We observe a wide spread of results, showing the diversity in fund strategies, from highly independent stock-pickers to those with a more benchmark-aligned approach. We highlight 4 funds with the greatest independence from the benchmark: • Lindsell Train UK Equity • Finsbury Growth & Income Trust • Aviva UK Listed Equity • Castlebay UK Equity What do they have in common? Low to zero allocations to sectors like Energy, Health Care, and Materials - proving their differentiated approach from the FTSE All Share index. However, it's crucial to note that while 'closet benchmarking' can suggest a lack of transparency, that might not be the case here. Many of the funds with lower active shares fall into specific categories, such as ‘tilt,’ ‘enhanced index,’ or ‘beta plus’. These approaches are deliberate and part of a well-defined fund strategy to remain aligned to benchmark indices. In terms of performance, the inset chart shows that high active share funds have outperformed their lower active share peers over time. Since April 2012, high active share funds have returned 164% on average, compared to 131.6% for low active share, 126.2% for medium active share, and 134.5% for the benchmark FTSE All Share ETF. What do you think about active investing with benchmark constraints? Is true independence from the benchmark the key to success, or do defined strategies with low active share still have a place in the market? #UKEquity #ActiveManagement #FundResearch #Investing #PortfolioManagement #assetmanagement #stocks

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"Conditional Betas": "Changing firm attributes and economic conditions lead to time-variation in betas... We compare several econometric or machine-learning methods...The 'individual LASSO'' method performs [best]." https://lnkd.in/erGHdbbM

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If you think portfolio risk management is just about diversification, think again. This article sheds light on some surprising strategies that challenge common perceptions. Here are some thought-provoking takeaways: - Did you know that reducing the number of investments in a portfolio can sometimes actually decrease risks? It's all about strategic selection. - Contrary to popular belief, actively managing risk doesn't necessarily mean more frequent trading. In fact, a hands-off approach can be a smart move. - One of the key points discussed is the importance of understanding the correlation between investments, a factor often overlooked in risk management strategies. - Asymmetric risk and the role it plays in portfolio management is explored, offering a fresh perspective on balancing risk and return. - Ever considered tail risk hedging? This article dives into this lesser-known strategy that can enhance risk management effectiveness. Share your thoughts and feelings on these unconventional risk management strategies. https://lnkd.in/ecgSpH93

“Political parties of all stripes are pushing for higher government spending” - according to a new thought-provoking paper on fiscal discourse from the IMF. In the U.S., support for fiscal expansion among Democrats is close to historic highs (the data series goes back to the 1920s) – something to think about in the run up to the elections and against the backdrop of the already wide general government deficit (which is expected to remain wide for years to come – check the latest CBO projections if you like a good horror story). The paper makes it clear that fiscal expansion discourse is a global trend, but EM look marginally better on this metric right now. And in our opinion, improving checks and balances in EM – including independent central banks which do not hesitate to tighten in order to send warning shots to the government (like this week’s expected rate hike in Brazil) – can improve fiscal outcomes. The market reaction to EM fiscal transgressions and rating agencies’ wrath are great disciplining tools as well (both are sadly absent in advanced economies most of the time). Mexico’s president-elect Sheinbaum was well aware of this fact when she re-appointed Minister of Finance Ramirez de la O, sending a message of fiscal consolidation hours after her victory. Indonesia adjusted its pro-growth aspirations to target a smaller budget deficit in 2025. India tightened its 2025 deficit target after the inclusion in the EM local bond index, because this is what Fixed Income investors care about. And the opposite is true as well - South Africa’s “fiscal sleeper” story contributed to a major post-election bond rally, and sovereign bonds in Argentina and El Salvador gave a round of applauds to 2025 draft budgets.

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Get ready for the Fall markets by reviewing trends in CEFs & BDCs from CEF Advisors’ 2nd Quarter Review and Outlook. We summarized the session in a short article. The full slides and replay can be found @ https://lnkd.in/eN79-CPX https://lnkd.in/eUQfd7AS

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Huge news in #cta #etf land: AlphaSimplex Group went live today with their managed futures ETF, $ASMF. Important points: - ASG put factor replication of #hedgefunds on the map when Andrew Lo wrote the seminar paper in 2006 (which convinced this guy 👆 to try to commercialize it....). ASMF has, at its core, replication. - Like Man Group, ASG runs a great #mutualfund and now is jumping into the ETF pond. The ecosystem keeps growing and more and more investors will have access to "institutional quality" managed futures products in client-friendly wrapper. - Virtus Investment Partners now owns ASG and is an investment powerhouse that can drive widespread investor education, led by the exceptional Kathryn Kaminski, PhD, CAIA, who coined the term "crisis alpha." To beat the DBi drum: managed futures ETFs represent around 0.02% of the ETF world. This for a strategy that arguably has more diversification value than any other liquid alternative. This is a greenfield, transformational opportunity that already has attracted the likes of Corey Hoffstein with ReSolve Asset Management, Jerry Parker, Mt. Lucas Management (with KraneShares), Simplify to join us, our partners at iM Global Partner, and comparative veterans WisdomTree Asset Management and First Trust. Grow the pie! https://lnkd.in/epfXYHTR

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"Asset Pricing with Cognitive Biases and Deep Learning": "Biased expectations can explain two central puzzles in the asset pricing literature: the equity premium puzzle and the excess volatility puzzle." https://lnkd.in/euFNTFM7

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Türkiye’s pivot musings: => Türkiye’s manufacturing PMI dropped to the post-pandemic low in September - yet another sign (alongside positive net reserves, improving external balances, lower gold imports and FX-protected deposits) that the policy U-turn is working as intended. => But is it enough for a monetary policy pivot and a rate cut already this year? A lot will depend on the central bank’s ability to meet its year-end inflation target of 38%. Quick calculations show that for this to happen, monthly CPI should average 1.15% or less in September/December. The September print (on Thursday) will show whether this is feasible.

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December indigestion caused by the Federal Reserve's comments today? The S&P was humming along until the FOMC cut 25 bps as expected, and the changes to the statement were trivial (although the vote to cut wasn’t unanimous). Chairman Powell wasn’t a reassuring voice at this meeting, and the market’s confusion led to hawkish projections and speculations for 2025. The S&P 500 closed at the day's lows, -3%. Capital flow was heavy at 145%. Today's move lower in the stock market was significant. We’re below the 50-day moving average for the first time since September. We’re not oversold (yet), and we’re (only) back at mid-October levels. From a technical standpoint, the rest of December should be a race for the exits….but dip-buyers will (most likely?) do their thing. It's worked for the last 12+ years, so why stop now? Considering today’s drop is rooted in a market unprepared for a Fed that wasn’t gung-ho with spiking the punch bowl a lot more, it could mean that once investors relax and think, they won’t believe this is all that bearish. If that’s the case, watch for an enjoyable bounce back. In summary, the fundamental landscape isn’t radically altered; however, the emotional landscape temporarily is.

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What's the best time to extend duration when rates start to come down and curves start to "disinvert"? Should you "T-bill and chill" until the central bank pulls the trigger and starts cutting, or is the juice all squeezed out of longer yields at that point? It’s a relevant question as more and more central banks start cutting rates, particularly for economies such as Iceland where policy rates are probably some distance above neutral. Thankfully, there’s a highly relevant and recent case study. A group of mostly EM economies with a thorny inflation history hiked rates early and fast in 2021, which helped bring inflation under control fairly quickly and allowed for rate cuts as early as last summer. I tried to search for clues based on the experience of these EM early hikers in a note to clients earlier this week (see link for a great summary by the editor of Innherji Hörður Ægisson: https://lnkd.in/ggNiP9sV). The average policy rate in these economies rose by 960bps, but has been cut by 290bps since last summer. During that period, 10Y yields rose on average 630bps, but have since rallied by 210bps. In other words, there is pretty strong transmission up the curve from the policy rate, leaving some interesting ways to play duration… which just leaves the question of timing. Here’s where things get interesting: On average, most of the rally in longer term yields takes place in around 300 trading sessions *before* the first cut. So far, there has been very little tightening of long yields *after* rate cuts commence. In other words, the rally tends to be driven by the end of hiking cycles, more than by the start of cutting cycles – when the cuts finally start, chances are there’s not a whole lot of juice left in longer term yields. Of course there’s no guarantee this pattern will be repeated, but it does support my gut feeling that the way to play policy normalisation is to be fairly discerning about placement on the curve, rather than blindly loading up on duration (even more so in markets where term premia have been eviscerated by QE).

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This is Cliff Asness' new upcoming paper in the 50th Anniversary Issue of The Journal of Portfolio Management. "Market efficiency is a central issue in asset pricing and investment management, but while the level of efficiency is often debated, changes in that level are relatively absent from the discussion. I argue that over the past 30+ years markets have become less informationally efficient in the relative pricing of common stocks, particularly over medium horizons. I offer three hypotheses for why this has occurred, arguing that technologies such as social media are likely the biggest culprit. Looking ahead, investors willing to take the other side of these inefficiencies should rationally be rewarded with higher expected returns, but also greater risks. I conclude with some ideas to make rational, diversifying strategies easier to stick with amid a less-efficient market." Link: https://lnkd.in/dTRz9ynk jean-philippe bouchaud

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JPMaQS documentation: "There is strong evidence of a positive predictive relation between relative labor market dynamics, defined as relative improvement in the base currency area versus the benchmark area (USD or EUR) and subsequent FX forward returns."  https://lnkd.in/e-stsCBB

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“Sustainable Investing: Evidence From the Field” - a new paper from Alex Edmans, with Tom Gosling and Dirk Jenter. It challenges some pre/misconceptions about how investment managers think about the E and S of #ESG. We were lucky to get a sneak preview from Alex when he came to visit us Baillie Gifford last week. #LongTermInvesting #Sustainability

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Check out my macro notes just released:) Some interesting insights from the Snb and Norges decisions today along with thoughts on the S&P 500's outperformance in the last month against global asset classes. Enjoy:) https://lnkd.in/gcaEFYje

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Acadian Asset Management has an interesting study on concentrated portfolios (“𝗖𝗼𝗻𝗰𝗲𝗻𝘁𝗿𝗮𝘁𝗲𝗱 𝗘𝗾𝘂𝗶𝘁𝘆: 𝗣𝗿𝗮𝗰𝘁𝗶𝗰𝗲 𝗩𝗲𝗿𝘀𝘂𝘀 𝗣𝗿𝗲𝗺𝗶𝘀𝗲” https://lnkd.in/eZsdkM9f ) Being a systematic manager which invests in very diversified portfolios, Acadia’s conclusions are not a surprise: “𝘉𝘶𝘵 𝘪𝘯 𝘢𝘯 𝘦𝘮𝘱𝘪𝘳𝘪𝘤𝘢𝘭 𝘢𝘯𝘢𝘭𝘺𝘴𝘪𝘴 𝘰𝘧 𝘢 𝘣𝘳𝘰𝘢𝘥 𝘴𝘦𝘵 𝘰𝘧 𝘤𝘰𝘯𝘤𝘦𝘯𝘵𝘳𝘢𝘵𝘦𝘥 𝘴𝘵𝘳𝘢𝘵𝘦𝘨𝘪𝘦𝘴, 𝘸𝘦 𝘧𝘪𝘯𝘥 𝘯𝘰 𝘦𝘷𝘪𝘥𝘦𝘯𝘤𝘦 𝘵𝘩𝘢𝘵, 𝘪𝘯 𝘱𝘳𝘢𝘤𝘵𝘪𝘤𝘦, 𝘵𝘩𝘦𝘺 𝘰𝘶𝘵𝘱𝘦𝘳𝘧𝘰𝘳𝘮 𝘢𝘴 𝘢 𝘨𝘳𝘰𝘶𝘱.” Concentrated equity strategies have drawn considerable interest from institutional investors in the long-only universe: frustrated with active fees charged for closet indexing, the premise of investing with stock pickers who focus on a limited set of “high conviction” holdings has intuitive appeal. The main result from the study is “𝘵𝘩𝘢𝘵 𝘸𝘩𝘪𝘭𝘦 𝘥𝘪𝘴𝘤𝘳𝘦𝘵𝘪𝘰𝘯𝘢𝘳𝘺 𝘴𝘵𝘰𝘤𝘬 𝘱𝘪𝘤𝘬𝘪𝘯𝘨 𝘢𝘣𝘪𝘭𝘪𝘵𝘺 𝘴𝘶𝘳𝘦𝘭𝘺 𝘦𝘹𝘪𝘴𝘵𝘴 𝘢𝘮𝘰𝘯𝘨 𝘪𝘯𝘴𝘵𝘪𝘵𝘶𝘵𝘪𝘰𝘯𝘢𝘭 𝘮𝘢𝘯𝘢𝘨𝘦𝘳𝘴, 𝘤𝘰𝘯𝘤𝘦𝘯𝘵𝘳𝘢𝘵𝘪𝘰𝘯 𝘪𝘴 𝘯𝘰𝘵 𝘢𝘯𝘺 𝘦𝘢𝘴𝘺 𝘴𝘰𝘭𝘶𝘵𝘪𝘰𝘯 𝘧𝘰𝘳 𝘪𝘯𝘷𝘦𝘴𝘵𝘰𝘳𝘴 𝘭𝘰𝘰𝘬𝘪𝘯𝘨 𝘵𝘰 𝘣𝘰𝘰𝘴𝘵 𝘢𝘤𝘵𝘪𝘷𝘦 𝘱𝘦𝘳𝘧𝘰𝘳𝘮𝘢𝘯𝘤𝘦”. Strategies with the most concentrated portfolios represent a disproportionate fraction of the best performers, but also of the worst performers: these strategies are either very good or very bad, no middle ground. “𝘛𝘩𝘪𝘴 𝘪𝘴 𝘪𝘯𝘵𝘶𝘪𝘵𝘪𝘷𝘦: 𝘤𝘰𝘯𝘤𝘦𝘯𝘵𝘳𝘢𝘵𝘦𝘥 𝘴𝘵𝘳𝘢𝘵𝘦𝘨𝘪𝘦𝘴 𝘥𝘦𝘭𝘪𝘣𝘦𝘳𝘢𝘵𝘦𝘭𝘺 𝘧𝘰𝘳𝘨𝘰 𝘥𝘪𝘷𝘦𝘳𝘴𝘪𝘧𝘪𝘤𝘢𝘵𝘪𝘰𝘯, 𝘢𝘯𝘥, 𝘵𝘩𝘦𝘳𝘦𝘧𝘰𝘳𝘦, 𝘥𝘪𝘴𝘱𝘭𝘢𝘺 𝘩𝘪𝘨𝘩𝘦𝘳 𝘭𝘦𝘷𝘦𝘭𝘴 𝘰𝘧 𝘢𝘤𝘵𝘪𝘷𝘦 𝘳𝘪𝘴𝘬.” This is also common sense: no one ever said stock picking is easy and for everyone. However, I believe the reason for the aggregate underperformance is due not to concentration per se, but rather to execution (as discussed in this book review https://lnkd.in/eWuZ2X_u ): 𝘁𝗵𝗲 𝗿𝗲𝗮𝗹 𝘀𝗸𝗶𝗹𝗹 𝗶𝗻 𝘀𝘁𝗼𝗰𝗸 𝗽𝗶𝗰𝗸𝗶𝗻𝗴 𝗶𝘀 𝗻𝗼𝘁 𝗶𝗻 𝘀𝗲𝗹𝗲𝗰𝘁𝗶𝗻𝗴 𝘁𝗵𝗲 𝗯𝗲𝘀𝘁 𝗶𝗻𝘃𝗲𝘀𝘁𝗺𝗲𝗻𝘁𝘀, 𝗯𝘂𝘁 𝗶𝗻 𝘄𝗵𝗮𝘁 𝘆𝗼𝘂 𝗱𝗼 𝗮𝗳𝘁𝗲𝗿, 𝘄𝗵𝗲𝗻 𝘀𝘁𝗼𝗰𝗸𝘀 𝗲𝗶𝘁𝗵𝗲𝗿 𝗴𝗼 𝘂𝗽 𝗼𝗿 𝗱𝗼𝘄𝗻. 

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Türkiye’s impressive but uneven macroeconomic adjustment - Progress in some areas, challenges in others: => The country’s current account posted a larger than expected surplus in August signaling that earlier improvements are not one-offs => Türkiye’s disinflation progress, however, has been more bumpy - the latest inflation print overshot the consensus and 12-month inflation expectations were largely unchanged at 27.44% => Fast disinflation is Priority #1 for Turkish authorities, and a slower progress can easily delay rate cuts until 2025

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"Looking at the historical relationship between the S&P 500 forward P/E ratio and subsequent three-year returns in the benchmark index shows that the current forward P/E ratio at almost 22 implies a 3% annualized return over the coming three years", writes Torsten Slok the Chief Economist at Apollo Global Management via The Daily Spark. A 3% annualized return from the S&P 500 indicates that the go-forward performance of all of the passive and active public equity strategies designed to mimic the returns of the market index will be insufficiently below an asset owner's minimum nominal return threshold (estimated to be 5% plus CPI). Add the well-chronicled backlog of private companies awaiting exits and the resulting illiquidity travails of private equity funds, how and from where will asset owners source suitable investment results to fund their organization's on-going spending and payout needs? Asset owners should now be untethering their public equity exposure from the anemic expected results of the S&P 500 (3% annualized?). Continued fealty to status quo, tracking-error constraints and style-box fidelity will impede an asset owner's ability to earn adequate nominal investment results. Investors should now consider the merits of liquid, publicly-listed equity strategies that pursue satisfactory absolute returns that reliably exceed an asset owner's minimum spending hurdle (estimated to be approximately 7%-8%). See link: https://lnkd.in/eQseqFHi

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Fixed income in 2024 - Lessons from History | Steven Friedman and Valentina Chen examine how asset allocators should consider the role of fixed income in their portfolios in 2024. Steve looks at the potential benefits but also analyzes three scenarios that present downside risks. https://bit.ly/440WKKe

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