Wednesday, June 24, 2020

COVID-19 and the critical role of pervasive tech

By ANITA KILLIAN/Wellington Management

The coronavirus pandemic has had a startling impact on global investment markets and has drastically affected daily life. But one positive trend that may be being overlooked is the way pervasive tech is helping countries weather the crisis. China was the first to experience the virus and it implemented some of the most extreme measures to help limit the spread. Crucially, it had the technology to adjust. 

Work-from-home (WFH) capabilities, streaming entertainment, and online food delivery are among the many tactical changes that could fuel long-term structural opportunities. In our view, the countries, sectors and companies with the strongest technological infrastructure will be best able to adapt. For example, China’s advanced digital solutions were vital to its rapid medical-supply response to affected areas.[1] 

The broad impact of 5G

We believe the proliferation of these changes will accelerate trends that were already creating a massive amount of new data. Fortunately, despite vast increases in data quantity, bandwidth-intensive apps, and video streaming, technologies can now communicate with each other better than ever.

For many, 5G brings to mind faster download speeds. But in a crisis like this, it is important to note it also offers a tenfold increase in the potential density of connected devices, enabling advancements like smart cities and pervasive tech. So, although the development of 5G is simply another step forward in communication speed, its ability to meet the exponential growth of data demand by both companies and consumers makes it a relevant innovation for every industry amid this pandemic.

Over a longer horizon, 5G also offers an opportunity for both the industries leveraging the innovation to improve their products and expand their addressable markets as well as the Asia tech companies producing the components necessary for the technology. 

For example, we’re particularly intrigued by two Taiwanese fabless semiconductor companies that we think will supply key hardware building blocks enabling the connection speeds that will prove to be essential in both the current crisis and in future industry revolutions. Notably, China plans to roll out a massive investment in 5G infrastructure over the next few years. 

Will the crisis create permanent shifts?

The ubiquity of tech offers unprecedented levels of connectivity, mobility, and resource/service access to new populations. This could have a hugely meaningful impact for countries trying to adapt to the coronavirus and could also be a long-term opportunity. We believe the pandemic is accelerating the penetration of many digital solutions, furthering trends and potentially breaking old habits. 

Out of necessity, new users are experimenting with grocery delivery, online education, streaming entertainment, and WFH. These solutions are proving particularly effective in China. In some countries, rapidly increasing user bases could challenge the number of customers companies can accommodate at one time. Streaming entertainment, online education, and WFH solutions are likely the most scalable beneficiaries of this crisis. The growth of ecommerce and food delivery is potentially more constrained due to their physical limitations. 

Though these are positive trends, it remains to be seen whether companies will retain customers when the pandemic subsides. Importantly, we think companies and consumers alike will then look to tech to help future-proof their lives. We believe many innovative providers will grow user bases, and old-economy companies could therefore face challenges to market share. 

Industry example: the growth of mobile gaming 

Mobile gaming is one industry that could see its already-compelling trend accelerate. We believe 5G offers the potential to revolutionize cloud-based gaming with much quicker download speeds, lower latency, and vastly greater potential connections. We think advanced mobile gaming will greatly increase the number of gamers, as the startup cost will no longer be prohibitively expensive (typically US$500 for a console and over US$1,000 for a PC). This could be as simple as subscribing to a gaming service like those currently available for movies and music. 

We believe the current environment’s impact on daily life further highlights the appeal of this opportunity set. In fact, in China, app downloads had a 40% increase in the first two weeks of February compared to 2019 averages, and gaming apps were more than triple the next most downloaded category (education).[2] Notably, traditional console makers did not seem to benefit as much from this increase.

In addition, we think demographic trends support the industry’s growth. Currently, 64% of the US population are gamers[3] with an average age in the mid-30s.[4] In our view, the next generation could nearly all be gamers, and the opportunity will further increase as gamers’ wealth rises with age.

The future of pervasive tech

In the next five years, we believe the pervasiveness of Asia tech will continue to broaden far beyond the industries traditionally thought of as “high-tech”. Beyond helping to weather this pandemic, Asia tech offers solutions like autonomous cars, predictive train-track maintenance, factory automation 3.0, and improved medical imaging. From leading-edge computer chips and image sensors to simple components like capacitors and compound chemicals, Asia tech is supplying the building blocks of innovation that enable everyday objects to be upgraded to “smart” tech. 

In fact, the connected device market could nearly triple in volume from 1.2 devices per person in 2018 to 3.4 devices per person in 2025. Notably, this growth is not restricted to consumer devices.

Asia at the forefront

Asia is a global leader at integrating this pervasive tech into society and leveraging the data it produces. The above examples merely scratch the surface of the many component-producing and technology-leveraging companies that we believe will ride the wave of Asia tech’s growth. The sector is driving abundant progress that offers long-term investment and access opportunities across industries and borders. The current pandemic further highlights the critical nature of this persistent trend.

Views expressed are those of the author and are subject to change. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.


[1] Harvard Business Review, “Delivery Technology Is Keeping Chinese Cities Afloat Through Coronavirus”, March 2020. 

[2] Financial Times, “China app downloads surge due to coronavirus outbreak”. As of 19 February 2020. 

[3] Nielsen, 2017. 

[4] Entertainment Software Association, 2017.

About the Author: 

How COVID-19's deflation shock may spawn inflation outbreak

Coronavirus has sent economies swooning, toppling consumer price indices. Rebounds in stock and bond markets on policy stimulus don’t mean market volatility is over, or that inflation is dead.


In the month to mid-March, COVID-19 drove the S&P 500 Index into bear market territory and corporate bond spreads up by several multiples. Less than a month later, U.S. blue-chip stocks, along with most global equities, rebounded into bull territory while credit spreads tightened by more than a third, as fiscal and monetary authorities open the stimulus floodgates to buoy fast-sinking economies.


Investors cheered by the waves of liquidity should keep in mind that many industries are operating far from capacity. While lockdowns to “flatten infection curves” help hospitals from being overwhelmed, they have sharply depressed demand for, and supply of, goods and services, as businesses retrench and unemployment skyrockets. Near term, this is deflationary, as economic growth collapses, bringing down prices with it.


Longer-term, though, investors shouldn’t ignore the risks of artificially fueled asset prices divorced from their underlying business fundamentals, and, at the macro level, the risk that long-lost inflation returns. Such risks simply can’t be discounted because “ZIRP” (zero interest rate policy), “NIRP” (negative interest rate policy) and “QE” (quantitative easing) didn’t produce inflation after the 2008/09 Global Financial Crisis.


This Time Is Different: Much More Severe Crisis, and Far Bigger Policy Response


The scale of the stimulus this time around is at least an order of magnitude greater, because fiscal stimulus is now complementing monetary stimulus, and banks, rather than seeing regulation and capital requirements sharply rise, are being used as conduits to get government aid to people and companies. Roughly half of the more-than $16 trillion in global stimulus is fiscal, much of which is central bank-financed debt monetization. The U.S. is leading the way, with combined monetary and fiscal stimulus of $7.62 trillion, equivalent to more than a third of national GDP. The eurozone and Japan are throwing more than 20% of their respective GDPs at their thawing if not frozen economies.


The U.S. Federal Reserve has certainly kept the financial-market plumbing from seizing up, preventing a liquidity crisis from turning into a solvency crisis and, in turn, impacting the banking system.


But as ugly economic and earnings data roll in, more volatility shouldn’t surprise. The International Monetary Fund has just chopped its global growth forecast for 2020 to -3% from +3.3%, which would be a far deeper decline than the -0.6% world-wide recession registered in 2009.


The IMF expects global growth to rebound 5.8% next year, with both the U.S. and eurozone jumping 4.7% and China soaring 9.2%. At the same time, it’s predicting consumer price rises of 1.5% in advanced economies and 4.5% in emerging markets. Bloomberg consensus sees U.S. CPI for 2021 at 1.7%, up from 1.0% this year, and China’s at 2.1% next year, down from 3.3% this year.


The assumptions built into those economic growth forecasts seem to incorporate second-quarter lifting of stay-home and business closure orders in the U.S., Europe and elsewhere, much as China’s labor force has largely returned to work since it shut down roughly three months ago.


Portfolios That Can Survive and Thrive in Adverse Environments


Whatever the assumed recovery timeline, though, the longer economies are hobbled by social distancing to constrain COVID-19’s spread, the longer the current damage to them, and the deflationary overhang, will linger. Elected officials in the U.S. are already suggesting that more government stimulus is necessary, and doubtless took note of Fed Chairman Jerome Powell’s statement in March that the Fed’s firepower is limitless. But money creation to finance budget deficits is usually inflationary, as Latin America learned in years past.


Whether a quick V-shaped rebound or drawn out U-shaped recovery, one thing is clear: a lot more money will ultimately be chasing fewer goods and services. That should not just juice risk asset prices, but also prices on those remaining goods and services available, once the economy starts to mend and consumers, after so much pent-up demand, begin spending again. That’s particularly so as more stimulus this time around is going straight to consumers and Main Street rather than Wall Street.


Moreover, if populism continues to gain steam and drives deglobalization in the form of trade tariffs and supply-chain re-alignment, which seems probable with respect to medical equipment and pharmaceuticals, production costs will also rise.


“Suppressed demand will come back and surge, which could trigger a shortfall of supplies as consumption should rebound before production normalizes,” says Portfolio Manager Lei “Rocky” Wang, who runs Thornburg’s international equity strategies.


While the pandemic may depress consumer and business sentiment for a while, restraining spending and investment, notes Wang, who early in his career worked at China’s central bank and a New York-based hedge fund trading currencies, “once the virus is under control, what will remain are very elevated public debt levels and political pressure on central banks to maintain low benchmark interest rates.” Sea-level interest rates amid an ocean of monetary and fiscal liquidity, less efficient supply chains and normalizing economic activity could together create a powerful inflationary impetus.


We’ll see if central bankers are disciplined enough to raise interest rates in a timely fashion. They tend to take the elevator down, and the escalator up, as the market saying goes.


Fundamental investors with an eye on the bigger picture can take advantage of continued market volatility to upgrade and position their portfolios to perform in a variety of market climates. Thornburg strategies have been targeting attractively priced securities of highly select companies with strong business models and balance sheets, visibility into future cash flows, as well as quality management. “In our experience,” Wang says, “these are the kinds of portfolios that can survive and thrive in adverse macroeconomic and volatile market environments.”

The views expressed are subject to change and do not necessarily reflect the views of Thornburg Investment Management, Inc. This information should not be relied upon as a recommendation or investment advice and is not intended to predict the performance of any investment or market.

About the Author: 

Managed futures: An all-weather investment

By TIM RUDDEROW/Mount Lucas Management

When most people hear the word “futures,” they associate them with commodities like corn, oil and precious metals. In reality, the futures market is incredibly complex, with contracts encompassing both physical goods as well as financial instruments such as currencies, stocks and bonds.

Managed futures are portfolios of futures contracts that are bought and sold by investment professionals. Managers employ hedging strategies to take advantage of upward or downward pricing trends identified through quantitative technical analysis. As an asset class, their main purpose is to manage risk within a portfolio by delivering uncorrelated returns, although historically they have often outperformed the broad market in times of economic duress.

Hedgers and Speculators

Futures investors generally fall into three categories. Buy-side hedgers, such as oil refineries and food manufacturers, who use futures to lock in future purchasing prices for the raw materials they use. Sell-side hedgers, such as farmers, shale oil producers and mining companies, use futures to lock in higher future selling prices for the commodities they produce to offset potentially lower prices in the physical markets. Speculators attempt to profit by taking on the risk premium both buy-side and sell-side hedgers are willing to pay to reduce their own price risks.

A Trend-Based Strategy

Managed futures is a general description of an asset class comprised of a professionally managed portfolio of futures contracts. Their overall purpose is to improve the risk/return profile of a portfolio by delivering returns with low correlation to those of the equity and bond markets. They also offer the additional benefit of generating strong returns during periods of market stress, such as we’re going through right now.

Nearly all managed futures investors employ trend following strategies. Trend following is a quantitative trading method used to capture risk premiums that occur during periods of market volatility and price dislocation. Professional trend followers use patented algorithms that signal the beginning of potential large pricing trends, and then take short and long positions to capture the returns.

While managers may consider current economic and market conditions when looking for certain sectors, currencies or countries to focus their analysis, their actual trading decisions are based primarily on pricing trends. Fundamental factors are not considered.

Non-Correlated Returns Plus Outperformance in Times of Stress

Managed futures are most commonly used to deliver non-correlated results under most market conditions, serving as a risk mediator within the alternative investments allocation of an institutional portfolio. Generally, they deliver lower relative returns during periods of price stability. But during periods of market stress, managed futures often outperform the broad market, as illustrated in the following chart. 

This chart represents all declines of more than 10% in the S&P 500 since 2010. Past performance is not indicative of future results. No investor has achieved the exact performance results presented herein. The performance shown for the MLM Index™ EV (15V) and MLM Global Index EV (15V) is based upon a historical index and is gross of any fees and expenses. There is no guarantee that performance results in the future will be similar to those shown herein. The S&P 500 index is an unmanaged index consisting of 500 stocks chosen by the Index Committee of the Standard and Poor's Corporation that generally represents the Large Cap sector of the U.S. stock market. Returns for the S&P 500 index reflect the reinvestment of all dividends.

Over the past decade, when global economic and market events have spurred a selloff in the broad market, managed futures, as represented by the MLM Index, a recognized benchmark of the returns available to managed futures investors, often delivered exceptional non-correlated returns during these periods.

A Frequent Chart-Topper

When included in a diversified asset allocation strategy, managed futures not only can mitigate risk but often outperform all other asset classes, particularly during recessionary periods, as illustrated in the following table of periodic returns spanning the past 20 years.

Past performance is not indicative of future results. This is not an offer to sell or a solicitation to buy any security. Any such offer will only made by the Confidential Offering Memorandum of the Fund. No investor has achieved the exact performance results presented herein. The performance shown for the MLM Index™ EV (15V) is based upon a historical index and is gross of any fees and expenses. There is no guarantee that performance results in the future will be similar to those shown herein. * 2020 results represent YTD results through 4/30/2020.

As we see, the MLM Index was the top-performing asset class in four of those years and in the top three in five other years. More impressively, in 11 of those years the MLM Index outperformed the S&P 500. As of this writing, the MLM Index is the top-performing asset class index in 2020.

Because managed futures investors employ trend following strategies to capitalize on pricing spikes, they tend to perform best during periods of high market volatility such as those that occur during market downturns. Thus, we see that the MLM Index was a top performer in the wake of the burst of the high-tech bubble in 2000 and in the post 9/11 recession of 2001 and 2002, as well as during the collapse of the markets in 2008 that marked the start of the Great Recession.

Conversely, managed futures tend to underperform in years when domestic and international equity markets grow at a steady pace with low levels of volatility. In fact, over the past 20 years, returns have historically correlated most closely with those of investment-grade bonds, a reason why many institutional investors use them as risk mitigators.

Managed Futures in the COVID-19 Era

The current Coronavirus-driven bear market has provided numerous opportunities for managed futures investors to exploit pricing opportunities in various categories.

One example: When the global economic contraction began in March, savvy investors took short positions in oil and natural gas futures, a strategy that paid off handsomely when fossil fuel prices collapsed in April.

Another example: When the extent of the economic damage in the U.S. became apparent, many investors, anticipating a global stampede to safety, went long on U.S. Treasury futures, which rallied strongly in spite of interest rate cuts that have driven yields to near-microscopic levels.

With the growing uncertainty of the long-term global economic impact of the pandemic, the markets are likely to experience periods of high volatility for the immediate future, creating a wealth of opportunities for managed futures investors to exploit.

How Much Should Investors Invest in Managed Funds?

In an institutional portfolio, managed futures usually comprise a portion of an allocation to alternative investments. Typically, we see managed futures allocations ranging between 10%-20% of the portfolio as whole, depending on the institution’s risk-return profile.

Managed futures can play a variety of roles within an institutional portfolio. The uncorrelated returns they generate can help reduce risk in times of market volatility. When markets are falling, they can often deliver positive returns through effective use of shorting. And when markets begin to recover, savvy managers can get in on the ground floor of upside momentum before the rest of the market catches on. Thus, for many institutions, managed futures can be an attractive all-weather investment.

This article is intended for informational purposes only. This material contains the opinions of the manager and such opinions are subject to change without notice. This commentary does not constitute an offer to sell or a solicitation of an offer to buy securities and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Any offer for an interest in a fund sponsored by Mount Lucas Management LP (“Mount Lucas”) will be made only pursuant to an offering memorandum of such fund.


About the Author:

The evolution of institutional investment structures: Revisiting managed accounts and the fund-of-one

By James Perry & Mark Weir/Maples Group

With the dawn of the global financial crisis of 2008 now over a decade behind us, it is important to look back and understand the evolution of institutional investment structures that has taken place. Manager-led products of the past are now often ignored in favor of more bespoke investment structures and customised, investor-driven solutions.

During the financial crisis, as redemption pressures led to the imposition of gating provisions and compromised liquidity terms, many institutional investors reconsidered their traditional approach of investing in commingled funds. As a result, there has been a surge in alternative structures, including managed accounts and the fund-of-one, that have provided investors with a greater degree of oversight and flexibility not typically found with more traditional commingled funds.

According to a recent AIMA survey[1] of 118 hedge fund managers globally representing approximately US$440 billion in assets under management, 53 percent of respondents agreed that offering customised solutions to asset owners is an important factor in aligning their interests with the investors. This is a significant increase from 2016 where only 14 percent of managers indicated the importance of customisation and an indication that this will continue to be a top priority as investment structures further evolve.

Managed Accounts

Historically, managed accounts have been the preferred structure for large, sophisticated institutional investors to create investment vehicles for the sole benefit of their participants or clients. This has enabled greater control of expenses, provides greater insight into the underlying portfolio of investments and overall performance, allows access to their own portfolio’s liquidity without impact from fund liquidity provisions, and mitigates risks from other investors.

An off-balance sheet managed account, in particular, can be a prudent structuring option and offers a number of benefits over on-balance sheet managed accounts that may lack overall structure and governance and pose greater risks. These off-balance sheet managed account structures ensure that there is a blocker entity which mitigates against contagion risk including the risk of excess losses through the use of derivatives. In addition, an off-balance sheet managed account often benefits from a higher degree of oversight with regard to its operations. It also typically includes independence of net asset value calculations, investment valuation verification, independent management fee and performance calculations, as well as expense processing and monitoring of expenses for compliance with the investment management agreement.

Overall assets among the top nine managed account platform providers stood at US$85 billion as of October 2019, a 13 percent increase compared to US$75 billion at the start of the year.[2] This growth is expected to continue as there has been increasing interest from a number of large allocators looking to build their own managed accounts platforms. However, there are a number of considerations that institutional investors should be aware of before building their own platforms.

With the increased flexibility that a managed account affords there comes significant additional operational requirements and burden for investors. Frequently, assets are held in the name of the investor which means that the investor may be directly responsible for all losses incurred on an investment. Additionally, because the institutional investor owns and controls the full infrastructure, they are responsible for ensuring smooth operations and contracting with the various service providers needed, a task that is often quite onerous and requires significant additional coordination and support.

Those who create managed account platforms directly often end up building out additional internal capabilities to oversee their platform’s operations. Institutions who do not have sufficient internal resources to manage the contracting and legal requirements will often hire a full service platform provider who will coordinate all aspects of the managed account platform. Larger institutions with greater internal due diligence and contracting capabilities similarly will often choose to work with a specialist service provider who can provide platform specific services such as legal entity structuring, operational set-up, service provider coordination and oversight, manager on-boarding, day-to-day operational coordination, daily risk and performance reporting as well as guideline monitoring.

The Fund-of-One Alternative

Increasingly, many investors who want to replicate the features of managed accounts without the operational and contracting burden have turned their attention to the more simplified fund-of-one structure. The fund-of-one is typically discussed in a similar context as managed accounts structures given that it is set-up to cater for the specific needs of an investor. However, the key difference lies in the fact that the fund-of-one structure is set up specifically for the investor with the underlying assets owned by the fund.

With the fund-of-one essentially being a single investor fund, the investment mandate and overall investment decision making process can be customised to specific requirements. In addition, these investment parameters can be incorporated into the governing terms which can be beneficial. In addition, the fund-of-one affords investors greater transparency and oversight with investors specifically able to obtain position-level information and more frequent and more detailed reporting. Investors may also have greater insight with respect to valuations and the calculation of fees.

The fund-of-one structure also offers an attractive combination of potentially improved performance along with reduced fees since they can be negotiated between the investment manager and investors on a standalone basis. Furthermore, the fund-of-one truly fosters better alignment, collaboration and consultation between investors and managers, ensuring there is a constructive dialogue taking place that clearly outlines the goals and objectives of the engagement to determine what solutions are most appropriate. Perhaps most importantly, the fund-of-one allows investors to capture almost all of the benefits of the managed account structure, including transparency, liquidity, increased control, and enhanced risk management. The institutional investor is still able to customise the mandate and segregate its assets from other investors without the associated operational burden and contracting responsibility.

Outsourced Support: The Maples Group Solution

The Maples Group combines industry leading capabilities in legal and structuring, fiduciary services, operations, reporting and technology to provide highly customised, cost-efficient solutions to help both managers and investors looking to establish managed account platforms or fund-of-one structures. Given the increase of investor-driven structures and the expectation that this trend will continue, the Maples Group is uniquely positioned to support institutional investors in establishing the optimal operational infrastructure.

Please visit the Maples Group’s website for more insights into the evolution of institutional investment structures.


[1] “In Harmony.” The Alternative Investment Management Association. 2019.

[2] “Top Managed Account Platforms 2019.” HFMWeek. 9 October 2019.

About the Authors: 

The pros and cons of buy and hold

By MARK SHORE/Coquest Advisors

The expression “buy and hold” is often mentioned in the equity markets. This means you buy a stock or a mutual fund and hold it for extended periods. It is a logical view as there is a growth component in the equity markets as an economy or firm may grow larger over time. However, what does that holding period look like over time when viewing portfolio metrics? The second question asks what does an investor experience when they buy and hold alternative investments? Indices of both asset classes are examined, and the results are shown below. 


The motivation for this question is derived from holding any investment for various periods, what is the historical experience of doing so, and will it impact portfolio allocation decisions? Ibbotson and Kaplan (2000) conclude about 90% of a fund’s return variability is explained by asset allocation suggesting asset allocation policy is an important variable to consider.[i] 

The holding periods are defined as the following durations of rolling periods: Monthly, three months, six months, 12 months, 24 months, and 36 months. This implies for each rolling period, what was the maximum return, the average return, and the largest loss during each rolling period. 

Figure 1 notes the changes in maximum returns, minimum returns, and average returns of the S&P 500 Index (SPX)and the BarclayHedge Managed Futures (CTA) Index from January 1980 to April 2020. As any equity index is a portfolio of stocks, the managed futures index is a portfolio of managed futures funds. The four decades of data include economic expansions, contractions, bubbles, high-interest rates, low-interest rates, and many other events.

Study Summary

A few points to note from this study:

  • The longer the positions are held, the larger the maximum return and average return for both indices. Similar to the results found with managed futures (Abrams, Bhaduri, & Flores, 2014).[ii]

  • The maximum returns of managed futures always exceed the maximum return for the S&P 500 in every holding period. This may be due to the positive skewness of managed futures return distribution at 2.54 indicating positive return outliers versus the -0.64 skewness of SPX over the 40 years.

  • In the rolling 24 and 36-month periods, the average return begins to see a small premium of the SPX relative to managed futures. 

  • The SPX experienced larger minimum returns as the rolling duration expands from monthly data (-21%) to 36 months (-43%). Whereas the managed futures minimum return in those same periods stayed relatively stable from monthly (-10%) to 36 months (-9%). 
    • The largest managed futures minimum returns are 3 and 6 months of -14% & -13%. The data suggests holding the investment for these short periods has potentially more downside variance. 
    • The negative skewness of SPX is an indicator of the negative return outliers. 

Figure 1

Figure 2 examines the periods from a risk management perspective. If you look only at the downside of each holding period, the data suggest a growing differential between drawdowns of the two indices. The average SPX loss expands to about 40% when examining two or more years of holding periods. 

Uncertainty can increase when an investor looks longer out on the investment horizon. Over the last 40 years of SPX returns, on average a -13% min return is feasible over a 12-month rolling return. Over a 2 year or 3-year period, a -40% min return average is possible. The data suggests over any of the holding periods a 3% loss is possible in managed futures with a historical potential for a -14% min return.

Figure 3 shows the minimum returns in each holding period and when it occurred. The fourth and fifth columns note moments when similar returns occurred in the respective holding periods.

Figure 3: Occurrence of Minimum Returns


Examining monthly data for the last 40 years of the S&P 500 Index and the BarclayHedge CTA Index, gave some insight into what has been experienced on the upside and the downside of holding periods. The data suggests returns of both indices may grow over time and the managed futures maximum return exceeds SPX in every holding period.

From a risk management standpoint, the SPX minimum return of each holding period surpasses the managed futures min return. There appears to be a reduction in downside volatility when the managed futures holding period reaches 12 months.

If allocation policy is an important variable for portfolio returns, then over the longer-term, combining the two investments may reduce the negative tail risk when viewing long-term investment horizons.

If you have questions or would like to receive more information on this topic, please feel free to contact the author at


[i] Ibbotson, R. G., & Kaplan, P. D. (2000). Does Asset Allocation Policy Explain 40, 90, or 100 Percent of Performance? Financial Analysts Journal56(1), 26–33.

[ii] Abrams, R., Bhaduri, R., & Flores, E. (2014, June). A Quantitative Analysis of Managed Futures Strategies. Retrieved from


The views expressed herein do not constitute research, investment advice or trade recommendations, do not necessarily represent the views of Coquest Advisors nor TEXPERS, and are subject to revision over time.

About the Author: 

Callan's detailed investment management fee study highlights key industry trends


Callan’s recently published 2019 Investment Management Fee Study provides a detailed analysis on fee levels and trends across multiple asset classes and mandate sizes for both active and passive management. The analysis gives insight into what institutional investors are actually paying (negotiated fees) versus the managers’ published fee schedules.

The study, the eighth examination of fees we have conducted, reflects trends on 2018 fees paid by Callan clients representing over $500 billion in assets under management and $1.8 billion in total fees paid, covering more than 350 investment firms and over 165 institutional investors.

Here are some of the key trends from this year’s survey:

  • 98% of total fees paid went to active managers, while 70% of assets were managed actively.
  • Fees were concentrated; 50% of total fees went to under 10% of management firms.
  • Hedge fund-of-funds had the highest fees: 112 basis points.
  • Passively managed U.S. large cap/all cap had the lowest: 2 bps.
  • Pricing power was strongest for private real estate and non-U.S. equity products.

I wanted to use this article to provide details about a number of the new features we added for this year’s study:

Actual vs. Published Fee Analysis: In addition to comparing the published fees for all products in each asset class category to the actual fees paid for client mandates in that category, this year’s study added a comparison to the published fees for only the products in each asset class that have client mandates. This new level of analysis provides insight into the published fees for successful products (i.e., those that received client mandates) and a better understanding of negotiated discounts.

Vintage Analysis: The study examined actual fees by vintage of hiring date to better measure fee trends over the last 20 years.

Industry Concentration Analysis: We examined concentration of assets under management (AUM) and actual fees/revenues by investment firm.

New Asset Classes: This year’s study added: 
  • U.S. mid cap equity
  • Emerging market debt
  • Multi-asset class (MACs)
  • REITs

New Vehicle: In addition to separate accounts, we added collective investment trusts to the study; mutual funds were excluded from the analysis. 

New Fee Data: In addition to basis points fees, we analyzed average mandate sizes and average fees paid in dollars to gain insights into the health of the investment management industry. 

Here’s a more detailed look at some of these new features:

Fee Analysis

The fee analysis was done for each asset class and is meant to show current industry fees from three perspectives: 

  1. Standard “published” fees from the broad universe of all competing products (universe published)
  2. Published fees (pre-negotiation) for only the subset of those products that have Callan client mandates (mandate published)
  3. Actual fees paid (after negotiation) for those client mandates (mandate actual)

As the chart above shows, the goal is to illustrate and compare the fees for the total competitive landscape, the fees for those products successfully winning mandates from Callan clients, and the actual fees those clients ended up paying in 2018.

Vintage Fee Analysis

The vintage fee analysis allowed us to dive deeper into fees for actual client mandates to illustrate the changes in the fee environment over the last 20 years. In order to better display these changes in investment management economics, the analysis focuses on not just changes in average actual fees in basis points (% of AUM), but also changes in average mandate sizes and the resulting changes in average dollar fees per client mandate. Examining fees in both basis points and actual dollars per client gives a clearer picture of how sustained downward pressure on both fee schedules and mandate sizes results in significantly lower dollar fees paid (manager revenue) per client. Showing results in dollars is more illuminating in cases where the average fee in basis points appears stable, but the average mandate size declines materially, resulting in a lower average dollar fee.

This analysis groups client mandates into three vintages based on the inception date of the mandate:
  • 1999–2008 (10 years pre-GFC)
  • 2009–2013 (first 5 years post-GFC)
  • 2014–2018 (most recent 5 years)

The vintage groups are further broken down into mandate size ranges. For each vintage and mandate size group we calculate: weighted average fee in basis points, average mandate size in dollars, and average fee per mandate (client) in dollars. 

Although we use inception vintage groups to differentiate industry fee dynamics over time, it is important to note that the fees being used are the current fees, not necessarily what they were at inception (original fees not reliably available). Since some clients do periodically renegotiate fees with their managers, it is likely that some of the mandates in the older two vintages (particularly the pre-GFC vintage) had higher fees at inception. This means our analysis probably understates fees in the earlier vintages and therefore also understates the downward change in fees from then to now. 

Concentration Analysis

The study also conducted a concentration analysis on the actual client fee dataset both at an industry level (active and passive) as well as asset class by asset class to provide insights into how the competitive pie is being allocated across investment firms by our clients. The results illustrate the number of mandates in each area as well as how many different firms manage those mandates. Concentration of market share in each area with respect to percent of total AUM and percent of total fees is highlighted by showing how many firms control 50% of each. Where relevant we also determined the market share of active vs. passive in an asset class.

The full fee study, which includes the detailed analysis for each asset class broken down by mandate size, is available here.

Contributors to the fee study included Alpay Soyoguz, manager of Callan's Measurement Development Group; Matt Loster, an analytical expert in the Measurement Development Group; and Shane Blanton, a business analytics specialist in the Published Research Group.

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Small-cap growth opportunities: Investment themes in a changing world

By BRANDON M. NELSON/Calamos Investments

We believe today’s market presents a very compelling case for small-cap stocks. Of course, it’s still a very murky picture, and impossible to predict if the bottom of the market is truly behind us. However, a speedy and massive response from central banks and governments worldwide and improving health care data have combined with extremely oversold markets to catalyze a stock market surge that began on March 24. 

Historically, small-caps have tended to outperform large caps in the early days of a new bull market, and small-cap valuations look very attractive relative to large-cap stocks as well. That said, not all companies will thrive despite the expansive stimulus and supportive Fed programs that have been put into place. Given the macro uncertainty and many moving parts in the market, we believe a selective and active approach are key to unlocking small-cap opportunities, with greater market inefficiencies in small-cap investing making manager skill that much more essential.

Investing in companies at the leading edge of new paradigm

Tomorrow’s investment winners will include select high quality cyclical growth names that can benefit from a rebounding economy as well as those benefiting from thematic tailwinds that will become more powerful as trends emerge in the wake of COVID-19. Even when the pandemic passes, we believe these trends will endure.

  • Work from home (WFH). WFH is driving high demand for an array of technology solutions. For example, a ramp up in laptop computer and data center server purchases have positive implications for semiconductor companies such as Diodes (DIOD), Lattice Semiconductor (LSCC), and SiTime Corporation (SITM). Other potential WFH beneficiaries include providers of communication software and connectivity tools, such as Ring Central (RNG), Five9 (FIVN), Nice (NICE) and AudioCodes (AUDC), as well cybersecurity software protection innovators, such as Ping Identity (PING) and Varonis Systems (VRNS).
  • Play from home. Increased demand for streaming services and video games creates more demand for bandwidth to enable those services. Also, the play-at-home trend can buoy a wide variety of companies that support the connected TV ecosystem, like The Rubicon Project (RUBI), an innovator in advertising technology. 
  • Shop from home/ecommerce. As consumers avoid shopping at physical stores, we see companies with proven ecommerce platforms and channels gaining an edge; leaders in the space that are supported by this theme include names like Chegg (CHGG), Yeti (YETI) and eHealth (EHTH). 
  • Telemedicine. Telemedicine providers such as Teladoc Health (TDOC) and Phreesia (PHR) are making new inroads as people become increasingly wary of going to a hospital or clinic where COVID-19 infection risk is higher. 
  • Home health. Hospitals are encouraging patients to be treated elsewhere if possible, to free up beds for COVID-19 patients, which benefits home health companies such as Amedisys, LHC Group (LHCG) and Addus Homecare (ADUS). Also, home health companies are eligible to receive stimulus dollars. 
  • Public safety technology. The pandemic is likely to drive demand for mass communication tools for citizens of countries, states, and cities, as well as for tools that can help police departments handle potential social unrest (gunfire detection technology, body cameras and data management of body camera footage). Top ideas in this theme include ShotSpotter (SSTI), Everbridge (EVBG) and Axon Enterprise (AAXN). 
  • Corporate bankruptcy and restructuring consulting services. Despite the stimulus dollars being deployed, there are likely to be some bankruptcies that will require consulting services from companies like FTI Consulting (FCN). 
  • Health care equipment. We expect sustained tailwinds for Itamar Medical (ITMR), a manufacturer of at-home sleep apnea tests, as well as for manufacturers of masks, face shields and ventilators. 


The small-cap space has long been the home of many innovative companies, some of which have grown into large-cap market leaders. As the world adapts to the challenges created by COVID-19, we see small-cap companies providing compelling solutions that create investment opportunities. Thoughtful fundamental research can lead to many stocks in this less-followed area of the stock market that can potentially benefit in this new world.

About the Author: 

Should investors avoid US healthcare stocks in an election year?


US healthcare is always a political hot potato, and volatility is expected to rise as the November elections approach. But investors can find good opportunities in the sector in companies with strong long-term business drivers that are relatively immune to political noise.

Many investors are wary of US healthcare stocks during an election year. Several Democratic presidential hopefuls have proposed a single-payer insurance system (Medicare for All) to replace existing private insurance. Drug pricing is another political minefield, with both Republicans and Democrats voicing concerns about rampant healthcare cost inflation.

Healthcare stocks are already under pressure because of US election concerns. While the median return for US healthcare companies in 2019 was 27%, the sector underperformed the S&P 500 by 3.7% despite strong earnings revisions (see chart below).

Current valuations reflect political fears. The US healthcare sector traded at a price/forward earnings ratio of 16.1 at the end of 2019, an 11% discount to the S&P 500 (see chart below). That’s somewhere between the two last trough valuations, which were also driven by political concerns related to public insurance proposals by the Obama and Clinton administrations. At the same time, select healthcare companies have strong profitability and attractive growth prospects, in our view.

So, what should investors do? Avoiding the sector means forgoing exciting opportunities with strong long-term potential. But healthcare positions may also expose investors to a bumpy ride this year.

Identifying Resilient Healthcare Themes

We think there are good ways to invest in US healthcare stocks with confidence—even in an election year. The key is to focus on companies that operate in a virtuous ecosystem. In other words, find companies that deliver products or services that are beneficial to customers, improve efficiency of the overall healthcare system, and are profitable to produce. Some attractive areas include:


  • Gene Sequencing—The medical industry is making rapid advances in genetic data use. Tools that isolate and analyze genes are being applied to a growing number of research, consumer and clinical applications. Long-term demand for these tools is unlikely to be derailed by any political scenario. Illumina, the market leader in gene sequencing tools, has a competitive advantage that should stand the test of time, in our view. 
  • Animal Health—Companies that supply products for pets and livestock are part of the healthcare sector, but their businesses aren’t really vulnerable to the same political risks. Zoetis is a case in point. Back in 2015, the company’s shares tumbled along with the pharmaceutical industry’s after Hillary Clinton tweeted her intention to impose price controls on prescription drugs if she was elected. Yet Zoetis is largely immune to the drug pricing debate. And the company has a solid business model, focused on improving profitability by reducing manufacturing costs, while pressing ahead with R&D that can augment returns. 
  • Technological Progress—The digital revolution is reshaping healthcare. Companies that help improve productivity and digitize clinical trial data can make a big difference. Veeva Systems is a healthcare software company doing just that. And given the heavy regulation of the industry, Veeva has a competitive moat to protect it from potential challengers. 
  • Diversified Healthcare—This might seem risky amid proposals for an insurance overhaul. However, we believe the proposals aren’t feasible, given the likelihood that they would trigger job losses and erode the quality of care. At the same time, some healthcare groups have resilient business models. For example, UnitedHealth Group (UNH)—which does provide insurance—has a diversified set of products and services, including a data-driven focus on generating insights that can improve healthcare delivery. The company has improved profitability significantly since the last two elections, and UNH’s contributions to longer-term solutions that could improve the US healthcare system’s efficiency renders its business relatively resistant to political pressures, in our view.

These are just a few examples of healthcare segments that have long-term staying power, in our view. Medical devices, robotic surgery and biotech companies are other areas where we believe investors can find opportunities in healthcare by focusing on business models without trying to predict scientific breakthroughs.

Of course, even companies that are relatively immune to politics will probably experience share-price volatility along with the sector as elections draw near. However, many healthcare companies have underlying businesses that simply aren’t affected by political issues. So, although their stocks may get shaken along with the sector, active managers can exploit the volatility to buy into companies that can ride out the elections and emerge as long-term winners.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams and are subject to revision over time. AllianceBernstein Limited is authorised and regulated by the Financial Conduct Authority in the United Kingdom.

About the Authors: 

Accelerating secular shifts are reshaping industries

The COVID-19 pandemic is disrupting the lives of people around the globe and changing consumer behavior in real time. While the long-lasting impacts of this pandemic are yet to be seen, we believe the virus is rapidly accelerating several big-picture secular shifts within certain industries that have been developing for years.

The Rise of E-Commerce and Digital Payments

The demise of traditional retail has long been predicted. As the COVID-19 crisis unfolds, more consumers are now shopping online, primarily due to the shutdown of nonessential brick-and-mortar stores amid government shelter-in-place policies and fears surrounding the spread of the COVID-19 virus. The easing of shutdown orders is unlikely to curtail this shift, which we now expect to occur at a faster rate than we were previously anticipating.

We believe the increased adoption of e-commerce will continue as the convenience and comfort of online shopping will likely result in a permanent shift in consumer behavior. Additionally, some smaller retailers may not survive the extended shutdown, resulting in fewer traditional shopping options, and many consumers may remain reluctant to return to physical stores due to fears of contracting the COVID-19 virus.

Some traditional retailers operate through multiple distribution channels, including both e-commerce and brick-and-mortar stores, allowing them to benefit from the accelerated shift to e-commerce. However, as more consumers shop online, in-store sales are likely to remain muted, putting pressure on the margins of many traditional retailers that operate brick-and-mortar stores throughout the country.

We expect select leading traditional retailers with loyal customer bases and large existing e-commerce operations to successfully navigate the shift. As expected, major online retailers, as well as companies that provide e-commerce infrastructure to other companies, are positioned to tremendously benefit from this shift.

Similarly, the use of cash as a payment method has been declining for decades amid the popularity of credit cards and digital payments. Currently in the United States, more than half of the transaction volumes are completed using credit cards.

Globally, however, that percentage is lower as the use of cash is much more prevalent. We see that poised to change, as concerns about contracting COVID-19 are likely to prevent people from carrying and handling cash and the growing popularity of e-commerce will likely spur the increasing use of digital payment methods.

The Shift Away From Linear Television

The use of linear television has been on the decline as video-on-demand (VOD) services and digital media are gaining popularity. The COVID-19 crisis is likely to accelerate this shift as shelter-in-place orders have kept people indoors with fewer entertainment options.

New content production and sports programming, which we view to be the primary advantage of subscribing to linear television, have also been put on hold as a result of COVID-19. We believe these factors will accelerate the shift toward VOD services as consumers may begin to realize the cost savings associated with these types of services, particularly in the absence of sports programming and advertisement interruptions that come with traditional programming.

Additionally, as linear television continues to lose viewers, we expect advertising dollars to shift toward various online and digital channels, furthering the demise of linear television. Roughly 20% of the U.S. population has already cut the cord, and we believe another 20% will follow suit over the next few years.

The Rapid Transition to the Cloud

Corporations have traditionally run their own data centers and invested in the necessary employees and equipment to do so. However, over the past few years, more companies have shifted to using enterprise cloud computing services for at least a portion of their software and processing needs.

The strategic benefits of cloud computing are plentiful—enhanced data security and optimization, scalability, reduced capital expenditure and operating costs, and improved mobility, which has quickly become a critical factor in the wake of the COVID-19 pandemic.

Efforts to contain COVID-19 have forced many companies to transition their employees to a work-from-home environment, which has prompted those that do not have the data center infrastructure necessary to support such a transition to outsource these needs. Companies that provide cloud computing and migration services have become instrumental in allowing businesses to transition to the cloud quickly and seamlessly.

We believe this experience is likely to force companies to acknowledge the importance and benefits of using the cloud and reevaluate their technology infrastructure.

It is estimated that about 15% of corporate processing needs, otherwise known as workloads, currently occur in the public cloud. While we expected that number to grow to more than 50% over the next few years, the pandemic has rapidly accelerated this transition over the past couple of months. As this trend continues to accelerate, well-established, dominant players in the enterprise cloud computing space are poised to benefit as they are able to provide the ample security, vast reach, significant cost savings, and required infrastructure.

An Increasingly Remote Workforce

Working from home is not a fad, in our view. As we previously mentioned, the COVID-19 crisis has forced many companies to transition their employees to a work-from-home environment. As a result of this, we believe corporations have discovered that employees who work from home can be just as effective and productive as they would be in the office, if not more so.

From a technology standpoint, previous obstacles that may have prevented companies from allowing employees to work from home will likely no longer be an issue as enterprise cloud computing services have enabled a smooth and seamless transition to a remote work environment.

We believe remote work is here to stay in some form or another, even after shelter-in-place orders have been lifted.

Companies are likely to be cautious in bringing employees back to traditional offices, at least until there is a solution to the COVID-19 dilemma, for fear employees could contract the virus during commutes or in crowded offices. Staggered schedules that reduce office density—where groups of employees alternate which days they work from home—will likely become common. Additionally, cost savings associated with a reduced need for office space will likely further motivate employers to shift to an increasingly remote work environment.

Supply Chain Diversification

We believe some companies had already started to rethink their supply chains and manufacturing sources heading into the COVID-19 crisis.

As the U.S.-China trade war intensified, companies began restructuring their supply chains to rely on multiple sources, including shifting a portion of manufacturing to other regions, rather than relying on a single source such as China. We believe this trend will accelerate, as the COVID-19 pandemic has highlighted the risks associated with the absence of a diversified supply chain.

This risk has been especially evident in healthcare. There have been shortages of critical personal protective equipment, a significant amount of which is manufactured in China, along with many basic pharmaceutical drugs. In an effort to be more prepared for future crises, we believe the U.S. federal government is likely to encourage U.S. healthcare companies to shift at least a portion of their manufacturing back home and to help set up a more robust U.S. medical testing infrastructure.


Past performance is not indicative of future returns


Investing involves risks, including the possible loss of principal. Equity securities may decline in value due to both real and perceived general market, economic, and industry conditions. Individual securities may not perform as expected or a strategy used by the Adviser may fail to produce its intended result. Different investment styles may shift in and out of favor depending on market conditions. Any investment or strategy mentioned herein may not be suitable for every investor.

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