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Viewpoints are our firm's educational commentary on markets, investing and decision making .

Earnings Growth and Performance | January 2024

While the allure of associating faster-growing economies with superior stock market performance is strong, empirical evidence challenges this assumption. Over the past 17 years, the correlation between forecast earnings growth and stock market performance over the subsequent 12 months was negligible. Conversely, earnings surprises and stock market performance during the same year was positively correlated. This Viewpoint dispels the notion that faster growth is a reliable predictor of future outperformance. It also cautions investors against chasing growth when making asset allocation decisions. | Download 

Diversification | September 2023

Nobel Prize winner Harry Markowitz described diversification as “the only free lunch in finance.” His mathematical framework demonstrates how the combination of two uncorrelated assets would be less volatile than either alone, and extends the concept to constructing “efficient” portfolios. The improvement in a portfolio’s efficiency from diversification depends on the assets’ expected returns, volatilities and correlations. This Viewpoint illustrates how all three metrics are necessary to construct efficient, risk-aware portfolios. Too often, investors address each separately. | Download 

Predicting Recessions | August 2023

Investment strategists spend time and effort addressing issues related to predicting recessions. They ask questions such as: Is there a recession coming? If one is coming, how soon? Will it be deep or mild? Will there be a soft landing? This Viewpoint examines the performance of the U.S. stock market before, during and after recessions. The analysis suggests that investors anticipate recessions and the recession’s subsequent impact on the economy. Recessions tied to the traditional economic cycle appear to have relatively little impact on the performance of the stock market—at least during the recession. | Download

Private Equity Performance Metrics | May 2023

Because private equity funds call and distribute capital over time, the standard approach used to evaluate traditional stock and bond funds is not appropriate. Instead, several other metrics provide understanding and insight about fund performance. In this Viewpoint, we will examine these metrics, the information that they provide to private equity investors, and how to meaningfully interpret the metrics in context throughout the private equity fund’s lifecycle. | Download

Unsmoothing Returns of Illiquid Assets | March 2023

The appraisal process used to value illiquid assets such as private equity and private debt smooths their reported returns. This Viewpoint addresses how unsmoothing reported returns should lead to better estimates of volatility and to better asset allocation decisions. | Download

Maintaining a Long-term Outlook | December 2022

In this Viewpoint, we highlight how pension plans develop asset allocations and select strategies based on a long-term investment horizon, but can show limited tolerance for significant underperformance, or lack patience for the payoffs of strategies with episodic returns. We examine several mismatches between maintaining a long-term outlook and situations which tempt investors to react to recent results. | Download

ESG Investing | October 2022

ESG-related investment policies consider companies’ behavior with respect to Environmental, Social and Governance-related factors when evaluating investments choices. ESG considerations include a spectrum of factors across the global economy. They are not constrained to traditional financial factors such as a company’s earnings, balance sheet, cash flows or a stock’s momentum, and in some cases may not have a clear link to corporate investment performance. Trustees are fiduciaries under ERISA. That requires trustees to act solely in the interests of the plan’s beneficiaries and to base investment decisions solely on considerations relevant to the risks and returns of the plan’s assets. | Download

Time Variation in Manager Performance | January 2022

Researchers have investigated using fund managers’ past performance to predict future performance for decades. For the most part, the research examined predictability on average. This research examines the persistence of period-to-period performance through time. We find that even after adjusting for standard style factors, the average alpha and the persistence of managers’ alphas varied through time. The implications are: 1) Investment processes have common elements that result in their portfolios having common exposures that are not fully captured by standard style adjustments, and 2) Because the style adjustment is incomplete, investors should not rely on past performance as a reliable indicator of managers’ skill. The performance may have been the result of skill, or it may be an artifact of incomplete adjustment for style. | Download

Cumulative Return | August 2021

Standard presentations in the investment management industry—both charts displaying rolling returns and tables using fixed period horizons—often conceal more information than they reveal. The result is that investors may draw (or be led to) erroneous conclusions. We believe that cumulative return charts are superior because they incorporate all relevant performance information without the biases introduced by rolling or fixed period return horizons. This Viewpoint illustrates how cumulative relative return charts help investors identify regime changes, cycles and other return patterns that are less apparent in rolling and fixed period horizon reports. | Download

Avoiding Investment Fads | June 2021

Every few years, investment banks and asset managers “discover” a new way to improve clients’ investment results. Sometimes it’s a new idea, and sometimes it’s an old idea that’s been polished, repackaged, and pitched as new. While it’s impossible to predict with certainty whether these new ideas will work, historical examples demonstrate that investors need to look below the surface, and carefully examine the basis for the new idea’s promised performance. We believe investors should focus on fundamental economic relationships. Too often these new investment ideas are promoted using assumptions that are specious and unlikely to hold. This Viewpoint will review several historical investment fads and illustrate how deeper analysis could have avoided or mitigated the attendant losses. | Download

The Role of Capital Market Assumptions | May 2021

There are two, somewhat independent, roles for asset class return forecasts. The first is to help investors set expectations regarding what their portfolios are likely to earn. The second is that the forecasts are an integral part of the asset allocation process. In this Viewpoint, we begin by illustrating the relationship between expected and realized returns and conclude by explaining the role of expected returns in the asset allocation process. | Download

Bear Markets' Impact on Pension Plans | January 2021

Markets go through multi-year cycles and regimes: bull markets, bear markets, periods of rising markets, and periods of sub-par returns. The focus of this Viewpoint is not simply the decline in a portfolio’s value during bear markets. Rather, it is the longer-lasting impact bear markets can have on mature defined benefit pension plans. 

Mature plans have negative cash flow profiles, paying out more in benefits than they receive in contributions. Even when stock prices eventually recover, the risk of this scenario manifests because assets will have been sold at depressed prices during the bear market to pay benefits. As a result, a plan’s gains during a recovery are less than the losses incurred during the bear market. | Download

Diversification versus Overconfidence | March 2020

Some famously successful investors downplay the case for diversification.

  • Warren Buffett, “Diversification is a protection against ignorance. It makes very little sense for those who know what they're doing.” 

  • Jim Rogers, “If you want to make a lot of money, resist diversification.”

While catchy, these recommendations ignore a crucial point—under-diversified portfolios concentrate risk. As a result, they are inappropriate for investors acting as fiduciaries, e.g., employee benefit plans. Such investors must be especially careful in balancing risk against return, must be particularly honest with themselves in appraising their skill, and must avoid overconfidence. In short, attempt to master what behavioral finance theory and decades of empirical research suggest are the most difficult of all investment skills. | Download

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