Conference Presentation, Panel, Fireside Chat
The Alchemy of Finance: Portfolio Construction Strategies
Milken InstituteSteven Toy, Brian Pellegrino, Hua Fan, Tim Hayward, Jane Buchan, Jennifer, HUA LIANG PENG YANG CHIU, DAVID LEVINSON, SHUO-CHUN LIU, DAVID KAPLAN, JULIANA GLEAVER, LIZ FONG, LIZ GARBUSKI, LIZ GAFFNEY, MICHAEL GREENSTONE
- Asset Allocation and Market Outlook: Traditional portfolio methods are challenged, with equities expected to outperform fixed income, which faces severe asymmetry and poor yields, particularly in Europe; the U.S. long bond is projected to be unlikely to repeat a 24% rally this year despite recent gains, while U.S. markets may rally due to expected disappointment elsewhere.
- Strategic Shifts and Vehicle Types: Investors plan to navigate uncharted territory by increasing allocations to private debt, litigation finance, energy credit turning into equity, and co-investments, while moving tactically between long corporates and treasury strips based on valuation; private equity strategies are shifting from core assets to secondaries and distressed opportunities in bulk metals and commodities.
- Valuation and Competition Dynamics: The private equity landscape is described as having high valuations and threefold increased competition since 2000, with new deals expected around six times EBITDA against an industry average of 10.7 times, while energy sector dislocation presents a forecast range from 20s to 90s that may dissipate; Japan is viewed as less competitive than the U.S. or Europe, whereas Europe is considered overowned and overvalued.
- Liability Matching and Hedging: Actuaries suggest swaptions offer better liability matching hedges than traditional instruments despite higher costs, and buying long bonds at current rates is seen as expensive, though the U.S. government bond market remains the most likely to generate returns during a crisis compared to other sovereign markets.
- Regional Specifics: The Chinese market is estimated at 52 trillion RMB in equity market cap with alpha available due to high retail volume and 5,000 registered hedge fund managers achieving a 22% average return in 2014, while a specific Irish real estate mezzanine fund targets a high single-digit current yield and low to mid-teens all-in yield.
- Risk Management and Returns: Absolute return portfolios target "LIBOR plus six," with risk-taking encouraged for smaller managers and reduced for larger ones; audience polls indicate a split between expecting sustained risk repricing versus volatility bounces within 2015, with many seeking tail hedges and anticipating market catalysts from credit, liquidity, and currency markets.
- Operational Constraints and Opportunities: Co-investment opportunities are limited to large allocators with significant capital and in-house expertise, though firms aim to avoid size constraints to pursue attractive risk-return profiles; high liquidity and wealth in the system are driving a lack of opportunities, necessitating creative evolution by managers.