A recent board meeting of the Brandes Institute Advisory Board included three high profile speakers — Larry Speidell, CFA, Chief Investment Officer, Frontier Market Asset Management, Dr. Peter Cowhey, Dean, Graduate School of International Relations and Pacific Studies, University of California, San Diego and Dr. Mary Kathryn Campion, CFA, President and Lead Portfolio Manager, Champion Capital Research. Fellow board member, Zev Frishman and I decided to summarize the main points from the discussions for Canadian Investment Review.
The first speaker, Speidell, addressed the topic of emerging and frontier markets. Some believe we are moving toward a strange new world. In the next 30 years, half the world may be hungry; sea levels could rise one meter, flooding many low lying coastal communities; and rising temperatures may reduce productivity in equatorial countries. Against this backdrop, developed countries may become more insular and protective as emerging frontier countries take a greater share of world capitalization.
On a free float basis, emerging markets currently constitute about 13% of the MSCI All Countries World Index. On a gross (total) capitalization basis emerging and frontier markets combined (generally includes countries with GDP per capita of less than US$10,000) are about 26% of the world (about 23% emerging and 3% frontier markets) – a significant increase over the past five to 10 years. Emerging and frontier markets combined are also 30% of world GDP and 85% of the world’s population. All of these factors give cause for sponsors to assess their benchmarks and allocations to world equity weights.
Emerging and frontier markets have some distinct advantages over developed countries: better demographics (i.e., much younger work forces), rich and under-developed raw minerals and energy resources, cheap wages, much lower consumer debt to GDP, better growth prospects and attractive equity market valuation.
Cowhey looked specifically at U.S. foreign policy and its implications for China and India. An expert on international trade, Cowhey recently completed a 12-month term as Senior Counsellor to the Obama administration Office of U.S. Trade Representation. He discussed the decisions facing the Obama administration, their choices and priorities, and a number of the practicalities encountered in dealing with China/U.S. changing relations in trade.
The Obama administration had to make tough decisions on the China tire dumping case, opting to send a clear message. This case illustrates the emerging differences between China’s view of international trade law and those of the developed world (“soft law” vs., “hard law,” as Cowhey described it). China’s treatment of intellectual property is perhaps the next contentious issue – another example of the state’s benign neglect of the private sector’s respect for established trade law.
Cowhey ended on a refreshingly positive note, contending that despite these challenges, the state of world trade has fundamentally improved and there is hope for further progress.
Finally, Campion talked about risk measurement and management, starting with a review of literature on risk management, covering Portfolio choice and asset pricing (Markowitz, Sharpe, Ross and Campbell), Dynamic asset allocation (Cochran, Lee, and Zimmerman), and Risk Management (Brown, Gilkenson, and Antonlin).
She discussed theory and implementation (pointing out where they depart) including: normality of returns, stochastic volatilities, state dependent strategies, and capital market expectations, followed by illustrations on risk parity, and risk measurement using VaR (historic and parametric).
Her conclusions were sound and circumspect, especially given the admittedly value-oriented audiences: the theory on risk analysis, while at times challenged in practice, is still a valuable construct for diversification of portfolios. Its users should be aware of time-variant volatilities and correlations, consider risk objectives as well as return objectives, and be flexible in risk measurement.
Bruce Grantier is President, Airth Inc.; Zev Frishman is Vice-president, Global Equity Strategies, Ontario Teachers Pension Plan