30 May 2016

Thank you to the Singapore Stock Exchange, SGX, for hosting and sponsoring the lecture on Multi-Asset Investing for Singapore based investment professionals. A phenomenal gathering and interesting discussion.


Participants from KWAP, Khazanah, Perkeso, ValueCap and other Malaysian government and private organizations attend a lecture on Multi-Asset Investing : A Practitioner’s Framework in Kuala Lumpur.
Multi-asset portfolios are like a bowl of nuts

Having just finished a robust discussion at the PIMCO office in Sydney, Australia with the local investment community, on our new book Multi-Asset Investing: A Practitioner’s Framework, we were waiting at the airport lounge with a drink and some nuts. I couldn’t help drawing an analogy with the words of Forrest Gump, that “Multi-asset is like a bowl of nuts”.

We create traditional portfolio structures with the naïve belief that equities and bonds are two separate asset classes (the left bowl). Whereas in reality it is a much more mixed structure (the right bowl). We don’t find newer ways to segment our nut universe of securities, in asset classes or geographies; we don’t find different ways to analyze risk in securities, like credit risk in equities; we still believe that alternatives is an asset class to be allocated to; we still believe the country where the security is listed, is where it’s risk is…….. and so much more. Of course in multi-asset investing, these issues become exceedingly important.

But to be able to create a more robust structure for investing in a multi-asset class world, we have to get rid of some of the most basic axioms we have been taught: the concept of CAPM, the concept of alpha and beta, the global market portfolio and the market cap weighted benchmark.

 As Arthur C. Clarke once said:

                                “I don’t pretend we have all the answers,
                    but the questions are certainly worth thinking about.”

Asia Asset Mgmt China  
Address at the Asia Asset Management Pension Roundtable in Beijing, China

We often hear about the problem of pension fund investing. The most discussed facet of this subject is the liability side - which encompasses issues such as DB vs DC, contribution management, benefit management and the share of responsibility between the sovereign, the corporate and the individual. Discussion about the investment side, which is equally important if not more, has not been challenged often enough.

I submit that the pension fund investment problem is only one of multi-asset allocation - questions such as active vs passive, beta vs smart beta, the use of alternatives, and the (incorrect) focus on long term investment horizons are at best of limited value in this context. Pensions don't become underfunded because they have the wrong manager, they become underfunded because of inappropriate asset allocation structures.

The allocation problem represents about 80% of the risk and reward of the pension portfolio, which is an absolute return, multi-asset investment problem. The approach to this needs to be completely revamped - from a single allocation strategy to multiple allocation strategies, from a single time horizon to multiple time horizons, from a limit on portfolio volatility to management of drawdown risk....and many such facets.

Thank you to the over 150 participants at the book launch event in Indonesia for Multi-Asset Investing: A Practitioners Framework.  A very thought provoking discussion on the investment process for multi-asset funds with the senior investment professionals in Indonesia.
CFA India Roundtable on Multi-Asset Investing

Pranay Gupta's book Multi-Asset Investing: A Practitioner's Framework was launched at a book event in Mumbai India. Inaugurating the India Roundtable of CIOs and CEOs from the Indian financial industry, Paul Smith, CEO of CFA Institute remarked that " the CFA Institute is always supportive of efforts to further the development of the industry, and perhaps India can leapfrog in the effort to develop a more enhanced allocation architecture".

The roundtable facilitated an intense discussion on the real investment issues faced by asset owners and the potential solutions to some of these outlined in the book. 
 New Zealand  
Disrupting Investment Management:  Reflections from a presentation in Auckland, New Zealand

Online banking disrupted traditional brick and mortar banking; mobile payment systems have disrupted traditional bank transfers and robo-advisers have disrupted financial advisory. Investment management has also seen some disruption with index fund ETFs disrupting active management at one end, and hedge funds at the other end. 

Yet no one has disrupted the core of investment management investment processes. The core beliefs of investing, centered around market weighted portfolios, alpha beta separation, around allocation and security selection, and in the specification and measurement of portfolio risk have remained unshaken for multiple decades. Perhaps they are ripe for evolution now.

Multi-Asset Investing: A Practitioner’s Framework, by Pranay Gupta, Sven Skallsjo and Bing Li propose that investment management processes need dramatic revolution from our current thinking if they are to really align with the interest of the asset owner.
  • Multiple asset classes DO NOT provide sufficient diversification.
  • Equity investment DOES NOT always provide a premium you can harness.
  • Asset class silos DO NOT provide clear separation.
  • Alpha-beta separation IS NOT necessary.
  • Portable alpha IS NOT appropriate.
  • Financial markets SHOULD NOT be categorized into Developed & Emerging
  • Active management MAY NOT add alpha.
  • Diversifying alpha by hiring multiple active managers IS REDUNDANT.
  • Asset management organizations are structured IN correctly.
  • Performance fee structures DO NOT align the interest of the asset manager and asset owner.
 Sri Lanka  
Address at the Institute of Policy Studies, Colombo, Sri Lanka on the changing face of Multi-Asset Investing and the skills required in this new investment world.
Discussion in Hanoi and in Ho Chi Minh City on the book Multi-Asset Investing : A Practitioner’s Framework,  and its relevance even for single country managers.
13 April 2016


Hosted by CFA Society Beijing, Pranay Gupta, author of Multi-Asset Investing: A Practitioner's Framework, began his book tour with an executive roundtable event in China, followed by a seminar with over 100 participants. In there Pranay discussed the advanced techniques in asset allocation with representatives from some of the largest sovereign wealth funds, insurance companies, investment banks and asset managers. We are delighted that Pranay will be presenting this topic to ten other CFA Societies in Asia Pacific in the coming two months.
 Alpha isn't dead  
Alpha isn’t Dead; but CAPM should be killed.

Much ink has been spilt over the active – passive debate, about the benefits of active investing and the virtues of passive funds. However, no one has stopped to question if this demarcation should exist in the first place. Isn’t this gulf between alpha and beta is nothing more than an artificial boundary created by the Capital Asset Pricing Model (CAPM).

CAPM was created as a framework to understand the source of asset return. However, it also created an artificial division between beta and alpha and between systematic and unsystematic returns. The investment industry went on to use this concept beyond its original intent, by creating active and passive products, structuring organizations and advocating that the basic mandate of most investment professionals should be to be engaged in beating a market cap weighted benchmark. None of these activities are however in the interest of the asset owner, whose objective has always been of absolute return.

At a basic level, asset returns are a function of the risks inherent in the asset, the exposure to these risks and the return attributable to that risk variable. The risks can be fundamental or quantitative, conceptual or tangible and macro or micro. While it is obviously not feasible to have an attribution for any asset to a definitive complete list of risk variables, the dilution of this concept to mere alpha and beta appears naive. Dispensing with the CAPM framework, and embracing this APT type framework for asset returns can however have dramatic consequences for the investment management industry, for the benefit of the asset owner. To name a few:
  • We no longer need market cap weighted benchmarks as a base case portfolio. These indices may well represent the aggregate market movement, but they do not represent the risk free or naïve portfolio for asset owners, like they are being used today.
  • There will be nothing like passive indexation. The benchmark for asset owners is absolute return. A strategy replicating a market cap weighted benchmark (ie: what we call passive today) is actually an active strategy with cash as the benchmark.
  • For smart beta to be smart, it has to beat a cash benchmark, not a market cap weighted benchmark.
  • Active management will have the objective of absolute return, to align with the asset owner. All strategies should have a cash benchmark.
  • There is no such thing as systematic and unsystematic risk. The risk factors for each security universe are different. There is no universal truth that we accept today labelled as systematic and unsystematic.
At the end of the day, all investment products and instruments, with any label we have put on them – active, passive, smart beta or alternative, are simply return distributions, each with a package of risk factors. All we do in the investment industry is package risk factors with different wrappers and labels – much like a tray of sandwiches: all with a basket of ingredients with a wrapper of some bread, and give it different names – a wrap, a club sandwich or a baguette.

Multi-Asset Investing: A Practitioner’s Framework
Published by Wiley Finance