Editor's Letter - Stock Market Myths: High P/E ratio, Volatility Tsunami & Share Buybacks
Hossein Kazemi
Revisiting the Role of Alternatives in Asset Allocation
Harsh Parikh, PGIM, and Tully Cheng, Neuberger Berman

From the US stock market’s bottom in March 2009 through December 2015, US broad market equity indices returned more than 200%, far surpassing the gains made in most alternative strategies. As a result, many institutional investors are finding themselves faced with the question: Why invest in alternative assets if they underperformed equities and cost significantly more than traditional strategies? To address this question, this paper explores the role of alternatives in institutional portfolios by reviewing hedge funds, private equity, and real estate investment strategies. They analyze the role of these alternatives from the beginning of 2000 to Q1 2015 representing two full market cycles.

Factor Investing in South Africa
Emlyn Flint, Peregrine Securities, Anthony Seymour, Peregrine Securities, and Florence Chikurunhe, Peregrine Securities

Risk factors and systematic factor strategies are fast becoming an integral part of the global asset management landscape. In this paper, they provide an introduction to, and critique of, the factor investing paradigm in a South African setting. They initially discuss the general factor construction process at length and construct a comprehensive range of risk factors for the South African equity market according to international factor modelling standards. Lastly, in the portfolio management space, they discuss several approaches for creating multi-factor portfolios.

Momentum: A Practitioner’s Guide
Hamish Preston, S&P Dow Jones Indices

This paper explores momentum as an investable concept and explains why over a 20-year period this particular factor has performed well relative to the S&P 500. With Mark Carhart’s 1997 study adding momentum to the Fama-French Three Factor Model it brought it into the forefront of risk management and active management process and made it part of the mainstream financial discourse.

More than Just a Second Risk Number: Understanding and Using Statistical Risk Models
Christopher Martin, Axioma, Anthony A. Renshaw, Axioma, and Chris Canova, Axioma

Although fundamental factor risk models are more commonly used and understood by portfolio managers, statistical factor risk models provide an important alternative and adaptable view on risk. In times of unusual market movements and trends that are not well modelled or captured by traditional fundamental factors, statistical risk models can be leveraged to identify these unexpected sources of risk. This paper describes how a combination of fundamental and statistical factor risk models can be exploited in any investment process.

Ranges and Rebalancing
Frederic Methlow, CAIA, Al Futtaim Group, and Abdulaziz Alnuaimi, CAIA, Harvard Business School

This paper tries to examine whether there is evidence that periodic rebalancing would yield significant results than a ‘buy and hold’ strategy. Moreover, the paper also focuses on the setting of ranges around the ‘neutral’ weight of a portfolio. It advocates an optimization approach where different tracking error levels are used to arrive at the highest information ratio. The resulting ‘efficient frontier’ reveals that there are optimal tracking error levels, meaning that beyond a certain tracking error the corresponding information ratio declines.

Performance Attribution in Private Equity: A Case Study of Two North American Pension Funds
Rainer Ott, Capital Dynamics, and Mauro Pfister, Capital Dynamics

Evaluating and quantifying the strengths and weaknesses of the investment process is key to portfolio managers, senior management, consultants and investors; performance attribution addresses this challenging task. However, the nature of private equity makes it difficult to apply any of the well-established public equity performance attribution models. This paper approaches the problem by developing an innovative model for private equity, which dissects the private equity portfolio performance into a base factor and four premiums: Illiquidity Premium, Strategic Asset Allocation Premium, Tactical Asset Allocation Premium, and Manager Alpha.

Applying an Enterprise Risk Management (ERM) Framework to Fund Governance
Masao Matsuda, CAIA, Lainston International Management

This paper argues that an enterprise risk management (ERM) framework should be applied to the governance of investment funds. Investment funds are generally structured as corporations, and each fund has shareholders and the mission of each fund is to maximize shareholder values. Properly implemented, the objective of a fund and the goal of an ERM process converge into one. Therefore, in order for a fund director to effectively exercise his/her oversight responsibilities, it is essential to systematically apply appropriate elements of an ERM process. Such a process not only covers duties normally expected of a fund director, but helps foster a risk aware culture among entities involved in the management of the funds.

Including Investment Process Technologies within Operational Due Dilligence
Dana Lambert, CAIA, and Rayne Gaisford, Olive Street Advisers

Active managers can improve their investment process meaningfully, starting with an awareness of the best decision engines for security selection and portfolio construction – systems which offer data-driven, analytical perspectives on both an ex-ante and ex-poste basis. Implementing the tools and techniques discussed in this paper can potentially move the performance needle meaningfully by bringing a systematic approach to the equation. These elements provide PMs a much more comprehensive information set and feedback loop than the usual market data provider/excel combination most in the industry still rely on.

From Theory to Practice: The Collaborative Model for Investing in Innovation and Energy
Jagdeep Singh Bachher, University of California Board of Regents, Ashby Monk, Stanford Global Projects Center, and Rajiv Sharma, Stanford Global Projects Center

Innovation and energy are likely to be two of the most attractive investment themes in the coming years. The world is moving to an increasingly technical and digital age, and the search for renewable sources of energy intensifies as the detrimental impacts of climate change increase in frequency and magnitude. Given that backdrop, the ‘Collaborative Model’ has emerged as a distinct model of institutional investment management that aims to re-orientate long-term investment capital more efficiently into long- term investments such as innovative companies and energy infrastructure. In this paper, they illustrate how beneficiary organizations can leverage their unique organizational competitive advantages for finding the most efficient access points for investments in innovation and energy.