It is notoriously difficult to predict movements in financial markets with any degree of accuracy. In fact, no one can predict with any statistical significance how the price of any financial instrument will behave over a given future time-frame.
In many ways, the prediction of movements in financial markets is similar to another time-series system that is notoriously difficult to predict: The weather. However, there is more predictability in weather patterns, due to seasonal certainty, compared to financial markets where there is very little certainty in what will happen tomorrow, never mind in a year’s time.
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The difficulty in predicting returns leads to some puzzling issues in modern empirical finance, especially since many of these modern processes rely on assumptions of future returns. Most notably, asset allocation is a process that distributes funds to different asset classes based on the long term returns the asset classes generate above a defined risk-free asset (in most cases the prevailing cash return and sometimes a rate of inflation).
In the aftermath of the 2008 financial crisis, a large pension fund turned to several of the best minds in academia in an attempt to uncover why they had suffered such severe losses. They contracted with Andrew Ang (Columbia Business School), William Goetzmann (Yale) and Stephen Schaefer (London Business School)*, who produced a journal paper on the fund which, as one may imagine, is somewhat technical and includes an extensive review on the Efficient Market Hypothesis. However, one of the key conclusions they reached is that even though the fund was well diversified across asset classes and invested with around 70 of the world’s top money managers; it was not diversified from a risk perspective.
The underlying managers were taking similar types of risks and exposing the fund, on an aggregate level, to large bets on certain risk factors which came under significant pressure during the financial crisis.
This leads to some critical thinking around the returns generated by managers and what risks are being taken with investors’ assets.
Most asset managers are intent on outperforming a specific benchmark, and they do this by utilising a predefined investment process, often referred to as the asset manager’s style.
A good example of style, ubiquitous in the equity market, is the Value philosophy which was conceptualised and formalised largely by Benjamin Graham and made famous by Warren Buffet. Most academics and market practitioners agree that value strategies outperform market capitalisation weighted indices over time.
The critical question is whether or not managers running Value styles are able to outperform, due to skill or simply because they are taking a different set of risks in their portfolios when compared to accepted market benchmarks. This, in some sense, makes the active versus passive investment debate somewhat blurred, as suddenly one may not be able to compare them reliably since they are arguably different from a risk perspective.
So much so that many consultants in the international market are now comparing active managers with benchmarks that are more representative of the risks that the managers are taking; leading to the emergence of the Smart Beta industry. Smart Beta indices utilise specific risk or fundamental factors in their construction process, and deviate from the pure market capitalisation weighted approach that is traditionally utilised in the industry.
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Although returns themselves are extremely difficult to predict, it seems that by allocating to differentiated risks, one is able to generate a statistically significant excess return or “Alpha”, over market capitalisation weighted indices.
Curiously, there are several styles that lead to an excess return expectation. Therefore portfolios should be constructed in such a way that they are weighted across diverse risk factors, as allocating solely to any one risk factor, no matter how diverse the number of managers, may lead to significant losses in asset value, due to risk concentration.
St John Bunkell, from Absa Alternative Asset Management believes that it is possible to enhance “Smart Beta investing” further by constructing portfolios that target Alpha over Smart Beta indices.
This is achieved by allocating to diverse risk styles, specifically utilising value and momentum strategies which he sees as two of the strongest empirical regularities in finance. He further asserts that, although there seems to be very little ability to predict Beta (general market risks and returns), there is some predictability in Alpha (relative return of stocks against indices).
Combining these two strong excess return drivers (value and momentum) within a very specific risk framework, as well as utilising fundamental and mathematical definitions of value and momentum, the Absa Alternative Asset Management team has created a unique fund range, referred to as the “Smart Alpha” fund range. The most critical component of these funds is to ensure that they continuously take the correct level of risk for the investor, as too much or too little risk may have detrimental consequences.
The investment strategies utilised in these new unit trust finds were previously only available to institutional investors, but are now available to the retail market.
If you are interested in these Unit Trusts or have any enquiries, please call 0860 111 456 or email email@example.com
Strive for the exceptional. Prosper.
*Andrew Ang, William N. Goetzmann and Stephen M. Schaefer, Evaluation of Active Management of the Norwegian Government Pension Fund – Global, December 14, 2009
Set Up Your SME For Success With Fibre
Boost your business potential when you plug into fibre. It offers unprecedented benefits, taking your business to the next level of connectivity.
More South Africans are turning to fibre for fast Internet access. We’re witnessing a boom in fibre expansion and as a result, it’s becoming a more affordable option for SMEs. Once businesses connect to fibre, they can access a reliable, ultra high-speed connection that unlocks the full advantage of cloud-based processing.
Cater to usage demands
A slow Internet connection can derail your business. It’s imperative for business owners to prepare their networks to handle additional usage requirements. Failing to do this might lead to interruptions, slowdowns and a potential impact on your bottom line. An Internet connection should be a tool that supports innovation and uninterrupted productivity.
Shift to the cloud
More businesses are accessing cloud-hosted information via Software-as-a-Service (SaaS) tools and other platforms. In 2018, nine out of 10 companies in South Africa said they had increased spending on cloud computing, according to a report by World Wide Worx and F5 Networks. Running your day-to-day business on the cloud requires you to have a more powerful Internet connection.
Support video and VoIP
Some businesses make use of video capabilities for training and meetings, and VoIP for sales and marketing. On a fibre line, businesses can ensure they meet these demands without putting a strain on the network. With fibre, business owners can run voice and Internet data on the same line but may look at installing a second data connection for redundancy.
Get what you pay for
There’s no denying it, fibre provides exceptional speeds and offers a brilliant price-to-performance ratio. You won’t receive the same contention ratio as other connection mediums – you will get what you pay for. Bandwidth caps are less of an issue with fibre because there’s a choice of affordable uncapped deals on offer.
Make the right choice
- Before you decide on your fibre deal, ask the right questions, understand exactly what you’re paying for and match your business requirements with the right amount of bandwidth.
- Choose a provider that allows you to manage growth for the long term – one that allows you to choose your deal, scale when necessary and not throttle your fibre line.
- You’ll also want an ISP to have your back further down the line. Insist on obtaining a comprehensive list of services along with the monthly fee. Ensure you are provided with a full service including all necessary support and equipment to deliver optimal fibre performance.
Ignite’s drive and purpose is to be the spark that inspires SMEs, which is why the Ignite Fibre service is structured to put you in control. Ignite offers you tailored packages that take into account your daily Internet and business startup needs.
Designing Her Destiny
Oh Yay! owner, Emmerentia van den Hoven does business her way.
In 2011, Emmerentia van den Hoven took a leap of faith when she decided to leave her graphic design job at an agency and pursue her real passion – and it has paid off tenfold. Here’s her story.
“When I started planning my own wedding eight years ago, I fell in love with wedding design and wanted to do that for the rest of my life. Designing for brands had become a set of rules rather than being creative, and I’d always wanted to work for myself. So, in September 2011, I turned my seven-month-old side gig into a fully-fledged business and launched Oh Yay!
I have to hustle every month to get new clients because every client will use my services maximum twice – first for the wedding invitations and then for the stationery on the day – so I don’t normally have returning clients.
Because my main business is seasonal and usually once-off per customer, I have branched out into branding for small businesses in the beauty and lifestyle industry. I also earn a passive income through the Oh Yay! online shop where I sell wedding décor items. Oh Yay Kids – my other online store – is my passion project. I launched it just before my second child was born, adding items to the store that I made for my two boys when I saw a need for it. I then expanded into prints for nurseries and kids’ party stationery.
I work for myself and have no employees, so the fact that QuickBooks lets me load all my services, products and prices in one place makes running my business so much easier. Being an entrepreneur is difficult because you don’t know if you’ll be successful or not. But if you believe in and love what you’re doing, it reflects in your work and the service you give.”
Less admin, more of what you love
When Oh Yay! was launched, along with her dream of being an entrepreneur, came the nightmare of other administrative tasks. But that changed in 2018 when Emmerentia started using QuickBooks.
“When I was using spreadsheets to balance my books, I was spending 80% of my time on admin, which left very little time to tend to customers’ orders. I now spend no more than 25% of my time on admin, which is important, especially when it comes to the speed at which I send quotes. You don’t get any work if you don’t send out quotes and it’s tough to juggle the admin with your actual job of running the business.
Numbers were never really my strong point, so having a professional quote done in record time not only projects professionalism, but the format also changes the way new clients see me. In my industry, the quicker you can send a quote out, the likelier you’ll get the clients’ business. It gives legitimacy to my business. The QuickBooks system operates so seamlessly that clients communicate with me differently, like I have my own accounting department, when in fact, I’m a one-woman-show.
I used to dread doing admin, but now it’s so easy and quick. I’m not just saying this – QuickBooks changed my life.”
The Future Of Fleet Management Is Now
Power up your fleet management and make even smarter business decisions with the new WEBFLEET. WEBFLEET is the award-winning Software-as-a-Service fleet management solution from TomTom Telematics, designed to provide you with the data needed to help your field operations become more efficient, more productive, safer and more profitable.
An improved interface and enhanced features mean WEBFLEET is now more powerful than ever before, and can be accessed anytime, anywhere on any screen. Find everything you need to help save on fuel, maintenance and administration costs, while delivering the quality service your customers demand.
It has already delivered proven results for customers across the globe and is powered by continuous innovation, meaning it is ready to grow with you and your organisation as goals and challenges change. Discover the future of fleet management now and help give your business an edge on the competition. Request a demo and find out more at telematics.tomtom.com/webfleet/landingpages/launching-the-new-webfleet.
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