By John Bowman, CFA, Executive Vice President, CAIA Association and Steven Novakovic, Managing Director, CAIA Curriculum for CAIA Association.
In mid-July, CAIA Association invited Marko Papic, Chief Strategist at Clocktower Group, to speak with a group of asset allocators about incorporating geopolitical analysis into their investment process. In 2020, Papic literally wrote the book on geopolitical analysis for financial professionals, titled “Geopolitical Alpha: An Investment Framework for Predicting the Future.” In it, he details his unique framework for assessing geopolitical risk. While at first read, the book may appear most relevant to macro hedge funds and tactical traders, many of the concepts are highly applicable to investors with long term time horizons.
To kick off the conversation, Papic took a step back to highlight how geopolitics influences financial assets. According to Papic, geopolitical risk can be thought of as having its own unique risk premia as well as influencing other risk premia (e.g., country risk, liquidity risk, etc.). In other words, investors can evaluate geopolitical “beta” along with geopolitical “alpha.”
According to Papic, geopolitical “alpha” more often implies shorter-term opportunities in which the geopolitical framework reveals mis-priced assets. Asset allocators are more likely to benefit from evaluating the geopolitical “beta” by incorporating a geopolitical framework into their asset allocation and portfolio construction process.
One example from the book of geopolitical beta is an application of the geopolitical framework on the medium-to-longer term economic outlook for India. At the time, Papic concluded that geopolitical factors were very likely to restrain economic growth in India. An asset allocator may take this information and reduce capital market expectations for Indian assets, or simply underweight India-focused strategies across their portfolios.
While Papic’s framework includes six core elements, the discussion in Chicago in mid-July centered on one factor Papic highlights as the primary driver of many geopolitical analyses – the Median Voter. While the Median Voter may sound vague and un-measurable, it recognizes the major influence voters have across the world (even in non-democratic societies).
While much of the data comes from non-traditional sources, there exists an abundance of voter preference surveys, many of which have long time-series of data. Evaluating these series can reveal long-term trends and changes in voter preferences which may influence policy decisions and political actions, regardless of party leadership. Importantly, precision is not as relevant with this data, more so the overall movement and trend in the responses.
At the end of the discussion, it was easy to walk away with a clear understanding of the role and importance of integrating geopolitical analysis into an investment process. Knowing where to start may seem daunting along with finding relevant data, however Papic encouraged everyone to give it a go, and not let the unfamiliarity of the task hold them back. While it may feel clunky at first, it is certainly worth the time and effort as incorporating a geopolitical framework to an investment process has the potential to add significant long-term value.
About the Authors:
John Bowman, CFA, serves as Executive Vice President for the CAIA Association, overseeing the industry leading CAIA charter, thought leadership and content development, and CAIA's Asia Pacific strategy.
John has devoted over 20 years to the asset management industry to recover the narrative of the value that the investment profession bring to society. He is a staunch public advocate for market integrity, long-termism, investor outcomes, diversity, human dignity and educational standards, as necessary ingredients to building a sustainable and healthy profession. John previously served as Managing Director for the Americas for CFA Institute, a region comprised of 40+ countries from Canada, the U.S., Central America, South America and the Caribbean. Bowman joined CFA Institute in 2004 after holding several industry positions. He served as a portfolio manager at Mellon Growth Advisors (MGA), where he was responsible for portfolio construction and stock selection for the MGA International Growth and MGA Global Growth strategies. Bowman also served as a portfolio manager for the International Growth Opportunities Strategy at State Street Global Advisors (SSgA) in its Global Fundamental Strategies Group. John is a prolific writer and commentator, frequently appearing in industry and business publications such as the Wall Street Journal, The New York Times, Pension and Investments, Financial Advisor, The Independent, Wealthmanagement.com and CNBC. Bowman earned a BS in Business Administration from Mary Washington College and is a CFA charterholder.
Steve Novakovic is the Managing Director, CAIA Curriculum for CAIA Association. In this role, he is responsible for managing the curriculum and ensuring the content remains relevant and reflects the current trends in the institutional asset allocator world. He joined CAIA Association in 2022 and has been a charterholder since 2011. Prior to CAIA Association Steve was a faculty member at Ithaca College where he taught a variety of finance courses including: Alternative Asset Management, Cryptocurrencies, and Wealth Management, among others.
Steve started his career at his alma mater, Cornell University, (B.S. 2004, MPS 2006) in the Office of University Investments. In his time at Cornell University, he invested across a variety of asset classes for the $6 billion endowment. His twelve years at Cornell generated substantial insight into endowment management, and fund investing across the alternatives and traditional landscape.