what can save active investment management? - nomura · 10/3/2017 · what can save active...
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© Nomura
Making choices in new dimensions
3 October 2017
What can save active investment
management?
Global Markets
Quantitative Strategies
EMEA
Anthony Morris
In their report for the Norwegian Government Pension Fund, Ang,
Goetzmann and Schaefer (2009) found that active management added
value in which asset class?
1. Equities
3.7%
2. Fixed Income
7.41%
3. Private Equity
11.11%
4. Real Estate
11.11%
5. None of the above
66.67%
Who has the biggest impact on your fund’s performance?
1. CIO
13.73%
2. PM
19.61%
3. Investment committee
29.41%
4. Operations/other back office
37.25%
What can save active management?
1. Artificial intelligence
18.37%
2. Cloud computing
0%
3. Big Data
22.45%
4. Meditation
14.29%
5. Ray Dalio’s management culture
6.12%
6. Jared and Ivanka
6.12%
7. MiFID 2/other regulation
10.2%
8. Other
22.45%
What is the world’s oldest profession?
1. Prostitution
35.85%
2. Military
9.43%
3. Hunting/Gathering/Farming
43.4%
4. Fiduciary management
11.32%
Source: Nomura.
Active management will survive
The Threat: active management, as currently done, fails to demonstrate value-added
The Opportunities: there are other ways to be active
Making choices in new dimensions
“The evidence…indicates that these 115 mutual funds
were on average not able to predict security prices well
enough to outperform a buy-the-market-and-hold
policy…”
-Michael Jensen (1967)
From “The Performance of Mutual Funds in the Period 1945-1964”, presented at the Annual
Meeting of the American Finance Association, Washington D.C.
50 years ago, the problem surfaced
“…there is very little evidence that any individual fund
was able to do significantly better than that which we
expected from mere random chance…”
-Michael Jensen (1967)
From “The Performance of Mutual Funds in the Period 1945-1964”, presented at the Annual
Meeting of the American Finance Association, Washington D.C.
50 years ago, the problem surfaced
Source: “Bonds are different: Active versus passive in 12 points”, Baz et al (2017), PIMCO Quantitative Research.
- Are bonds any different?
50 years later, the problem is still with us
-3
-2
-1
0
1
2
3
1st quartile 2nd quartile 3rd quartile 4th quartile
t-s
tat
of
alp
ha
Quartiles of US Fixed Income Fund Managers
Alpha t-stat
99% confidence
95% confidence
90% confidence
“There is no evidence that active fixed income
management has added value”
Ang, Goetzmann, and Schaeffer (2009)
Source: “Evaluation of Active Management of the Norwegian Government Pension
Fund—Global”, released December 14, 2009
The biggest threat to active management?
"The evidence does indicate....a pressing need on the
part of the funds themselves to evaluate much more
closely both the costs and the benefits of their
research and trading activities…"
-Michael Jensen (1967)
From “The Performance of Mutual Funds in the Period 1945-1964”, presented at the Annual
Meeting of the American Finance Association, Washington D.C.
Jensen’s advice—rethink the business model
Source: “Bonds are different: Active versus passive in 12 points”, Baz et al (2017), PIMCO Quantitative Research.
Diagnosis: No alpha, and everyone bets on High Yield
Active fixed income has become a carry cliché
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-3
-2
-1
0
1
2
3
4
1st quartile 2nd quartile 3rd quartile 4th quartile
t-s
tat
Quartiles of US Fixed Income Fund Managers
t-stat of alpha
t-stat of High Yield exposure
99% confidence
95% confidence
90% confidence
Source: Nomura, Bloomberg.
Active outperforms passive, but not the benchmark
50
100
200
400C
um
ula
tive
to
tal
retu
rns
(lo
g-s
ca
led
)
BBG Barclays US HY bondindex
Big US HY Active Managers
JNK US Equity
Source: Nomura, Bloomberg.
- CDS index: better liquidity, diversification, performance, and zero credit analysts/traders
New way to be active—upgrade format
50
100
200
400
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Cu
mu
lati
ve
ex
ce
ss
re
turn
s (
log
-s
ca
led
)Nomura HY CDS Index BBG Barclays US HY bond index (ex. ret over duration)
High Yield is a bundle of at least three exposures—but are they the best available?
New way to be active—decompose and recreate
Source: Nomura, Bloomberg. Analysis based on monthly returns from 1997-2017.
-0.20
0.00
0.20
0.40
0.60
0.80
1.00
1.20
Duration HY Credit MBS Curve Rates Vol Alpha(p.a.)
Beta
to
fac
tor
Big US Manager
15Source: Nomura, Bloomberg.
- HY Credit : Nomura US HY CDS Index instead of US HY Cash Bond index
- MBS : Nomura USD iVRP instead of US MBS Index
- Rates Vol : Nomura USD iVRP instead of US 1m10y
Making active better by upgrading formats
50
100
200
400
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
6
200
7
200
8
200
9
201
0
201
1
201
2
201
3
201
4
201
5
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201
7
Cu
mu
lati
ve
ex
ce
ss
re
turn
s (
log
-s
ca
led
)
Recreated using betterformatsDecomposed and recreated
Source: Nomura, Bloomberg.
Don’t fight the Fed, or Basel
New way to be active—do more than one thing
50
100
200
400
800
199
7
199
8
199
9
200
0
200
1
200
2
200
3
200
4
200
5
200
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200
7
200
8
200
9
201
0
201
1
201
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201
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201
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201
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201
7
Cu
mu
lati
ve
ex
ce
ss
re
turn
s (
log
-s
ca
led
)
HFRI Macro Index
Active management will survive
But not all active managers will
Survivors will need to be active in different ways
The Threat: active management, as currently done, fails to demonstrate value-added
“Stock-picking” and market-timing are the core activity of active managers
But zero evidence that this generates value over benchmarks
The Opportunities: there are other ways to be active
Improving formats (e.g. CDS index vs corporate bonds)
Do more than one thing (e.g. not just carry or trend)
Unbundling (decompose, recreate better)
Markets (going where curves are still steep)
Making choices in new dimensions
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Potential risks for the Nomura Volatility Risk Premium Indices and
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28