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Four Things Investors Need To Consider About The Controversial ‘Risk Parity’ Investment Strategy (The AllianceBernstein Blog)
After a good run, risk-parity strategies “have been struggling,” writes Daniel Loewy on the AllianceBernstein Blog. Risk parity refers to allocating in a way that puts an equal distribution of risk among the “risk contributions” in various asset classes of a portfolio. “This strategic focus on diversification leaves risk parity structurally underweight equities and overweight other return drivers — such as bonds, credits and commodities — compared with a traditional allocation,” writes Loewy. “That caused risk parity to lag in 2013, as the equity bull market strengthened and many diversifiers underperformed.” Loewy says his research has unearthed four things that investors should remember when considering the role of risk parity in asset allocations.
1. “In the long run, diversification should win. Risk parity can trail a 60/40 strategy over any short period of time, particularly when stocks flourish. But the 60/40 advantage isn’t likely to last. Over individual quarters or years, risk parity outperforms 60/40 about 55% of the time. But over five-year or 10-year periods, risk parity wins more than 70% of the time.”
2. “A dynamic approach to risk parity can help.”
3. “We believe the timing for investing in risk parity has improved.”
4. “Diversifying across manager strategies may improve performance.”
Why Chinese Stocks Are Worth Considering In The Long Run (BlackRock Blog)
“The MSCI China, for instance, is trading at a price-to-book ratio of 1.4, representing a 25% discount to the 5-year historical average and a 47% discount to U.S. equities,” writes BlackRock’s Russ Koesterich. In this light, Chinese stocks look attractively priced and a “good long-term value play.” Koesterich identifies three other reasons Chinese stocks are worth considering in the long run.
1. “China is making progress on much needed financial system reforms.”
2. “The Chinese government is unlikely to abandon their growth objectives.”
3. “The Chinese market is potentially less vulnerable to tighter U.S. monetary policy.”
Here’s How Fattening Profit Margins Contributed To Earnings Growth In Every Quarter Since 1994 (JPMorgan Asset Management)
Revenue, profit margins, and share counts drive earnings per share (EPS) growth. Despite weak sales, profit margins have been beefing up for some time now and have helped companies post record earnings.
Buying Corporate Bonds Has Got Pretty Hard (Bloomberg)
“Traders trying to purchase investment-grade notes are failing about 46 per cent of the time, close to the worst rate in more than four years as measured by activity on MarketAxess Holdings Inc.’s electronic platform,” reports Liza Abramowicz at Bloomberg. Typically, traders will offer to buy or sell these bonds in a specific time frame; if they fail to do so in that time, the transaction is said to have failed. This has happened, even though the U.S. corporate debt market has grown 53% since 2008.
Emerging markets suffered a rout after the Fed first started talking about tapering its monthly asset-purchase program and eventually tightening monetary policy. This raised concerns that these economies would have a hard time financing their deficits without foreign capital. “After reporting cumulative outflows of US$51.2bn (-6.6% of AUM) in the last 22 consecutive record outflow weeks, Dedicated EM Funds reported inflows of US$2.49bn this week,” Morgan Stanley’s Jonathan Garner wrote in a note to clients. “This is the first inflow week since October 23, 2013.”
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