Strategic Asset Allocation

Strategic Asset Allocation The Case for Global Capital Markets Clark: University of Evansville Contact Information Robert A. Clark, Ph.D., CFA Schroeder Family Dean School of Business Administration Vice President for Strategic Initiatives University of Evansville 1800 Lincoln Ave. Evansville, IN 47722 Telephone: (812) 479-2851 E-mail: rc60@evansville.edu Clark: University of Evansville Tools to become Better Advisers Clark: University of Evansville Global Opportunities/Challenges Clark: University of Evansville Indian markets strong despite terror attacks By Ilya Garger, MarketWatch Last Update: 7:11 AM ET Jul 12, 2006  BANGKOK (MarketWatch) -- Indian stocks advanced on Wednesday as investors focused more on better-thanforecast earnings from technology giant Infosys Technologies than a wave of terror attacks in Mumbai, India's financial capital.      The benchmark Sensex index, which tracks 30 issues on the Bombay Stock Exchange gained 2.97% to close at 10,930.09. Infosys (INFZF : INFOSYS TECHNOLOGIES LTD SHS INFZF0.00, 0.00, 0.0%) , India's second-largest software firm, reported that net profit in the April-June quarter rose 50% on the year to 8 billion rupees ($173 million), beating analysts' consensus forecast of 7.21 billion rupees. Shares of Infosys rose 7.48%. Financial markets showed resilience to the terror attacks. As many as 190 people were killed and more than 300 injured after eight explosions hit the city's commuter rail network during Tuesday's evening rush hour. See full story. And most observers don't expect the bombing to hinder markets over the long-term Clark: University of Evansville Major Challenge to 21st Investing: Understanding the Transformations in Global Business Clark: University of Evansville Understanding the Challenge Clark: University of Evansville World’s Financial Assets $118 trillion* (and growing)! (including bank deposits, government debt securities and corporate-debt securities, and equity securities) (*Year end 2003…. Versus $53 trillion in 1993, and $12 trillion in 1980) Clark: University of Evansville Financial Assets Shift away from banks and toward market institutions as the primary financial intermediaries. 1980 banks represented 45 percent of financial assets, by 2003 they represented only 30 percent. Clark: University of Evansville World Markets  US: Europe: Asia:   $44 trillion – dominated by private debt and equity. Banks play a larger role in finance. Financial markets are relatively isolated from one another and differ within the region. Clark: University of Evansville Financial Market Trends    Corporate debt is expanding in both the United States and Europe. Japan growth comes from a huge expansion of public debt. China and Eastern Europe all asset classes are growing quickly. Clark: University of Evansville Educational Gains Ghana Ethiopia Thailand Chile Kuwait Adult Lit Primary Secondary Tertiary Primary Secondary Tertiary *World Bank (Ed Stats) 1990 58.5 31.8 30.8 21.3 60.2 42.9 12.1 2003* 73.8 66.0 81.4 42.4 93.6 89.3 20.9 Clark: University of Evansville Developing Nations Now Constitute 40% of the World’s 50 largest Economies 50% of the 50 Fastest Growing Economies 70% of the 20 Fast Growing in Industrial Output 5.5% Annual Growth in Higher Education Grads vs. 1% 20% of the 50 Largest R&D Investors Clark: University of Evansville International Diversification The goal of international diversification is to benefit from the less-than-perfect correlation among various stock markets by forming a portfolio among various stock markets by forming a portfolio that has lower risk than an otherwise well-diversified portfolio of domestic stocks. Clark: University of Evansville Foreign Stock Funds Note: The average diversified international fund holds more than 10% of its assets in emerging markets names at the end of 2001, a bit less in 2002, and a bit more over the next four years. Clark: University of Evansville Diversification - Correlations  Transitions over Time – Greater Integration of Global Markets. Egypt South Africa Zimbabwe 1992-1997 1998-2003 1998-2003 0.00 0.13 0.26 0.45 ME & Africa 0.52 Clark: University of Evansville 0.07 -0.07 A Global View Clark: University of Evansville Compound Annual Growth rate: 1993-2003 United States Europe (Euro-Zone) United Kingdom Eastern Europe Japan China India 8.6% 9.8% 11.3% 19.3% 4.0% 14.5% 11.9% Source: MGI Global Financial Stock database Clark: University of Evansville Performance 1975-1995:  $1.00 invested Africa: $ 0.84  S&P 500 $13.14  Composite emerging markets $10.01 Clark: University of Evansville 2004 Emerging Market Winners 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Ukraine Slovak Republic Columbia Jamaica Egypt Bangladesh Romania Hungary Estonia Saudi Arabia 170.33% 126.91 126.20 115.21 114.00 107.61 100.08 96.01 91.52 90.04 Clark: University of Evansville 2005 Emerging Market Winners 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Egypt Jordan Saudi Arabia Columbia Lebanon Russia Pakistan Kenya Korea Romania 160.60% 120.00 115.10 113.50 111.78 85.70 66.00 65.38 62.60 61.09 Clark: University of Evansville 2005 Regions*       Latin America Asia EMEA Europe E.Europe ME & Africa December 2005 50.20% 25.70% 65.30% 67.00% 68.40% 64.40% *S&P/IFCG Indices – Total Return through Clark: University of Evansville Understanding the MAZE! Clark: University of Evansville Country Risk Analysis Even though sectors may be more important than they were 10 years ago, countries have not evaporated as a significant explanatory element of multi-country portfolio returns. Clark: University of Evansville Country Risk Factors          Political Risk Economic Performance Debt Indicators Debt in Default or Rescheduled Credit Ratings Access to Bank Finance Access to short-term Finance Access to Capital Markets Forfaiting Clark: University of Evansville Country vs. Sector Analysis Current research indicates that sector analysis dominates country analysis in selecting investment options. Clark: University of Evansville Allocation Issues   DECOMPOSITION of returns in terms of factor decomposition indicates that the country factor has declined in importance and the sector factor has increased in importance. Countries used to be the predominant explainer of returns, and sectors were relatively less important. Clark: University of Evansville International Accounting Standards Accepting a valuation orientation to investment selection as investors search for emerging market opportunities the “quality” of accounting information is critical. Clark: University of Evansville Emerging-Markets Funds Overall, they’ve posted a 24% annualized gain over the 2002-2004 period, which is better than all other types of mutual funds. Note: They plunged 46% between October 1, 1997 and September 30, 1998, due to local currency and other problems. Clark: University of Evansville Fixed Income Investments-2004   Average return for Emerging-markets bond funds for 2004 ~10% Bond-rating agencies have been upbeat concerning Russia, as that country has aggressively paid down debt. High oil and commodity prices have helped producers such as Russia, Brazil, and Venezuela. Meanwhile, Turkey’s improving public finances have also have also encouraged investors, as that country has strengthened its bid for European Union membership. Clark: University of Evansville Fixed Income - 2005 According to Morningstar Inc., returns on bonds that invest largely outside of the U.S. ranked as the second worst investments in 2005 with a -3.2% return. Emerging market bond funds hit record highs in 2005 returning 12% on average. The dollar rose almost 14.6% against the euro and 15.2% against the yen in 2005. Clark: University of Evansville Fixed Income Investments   Sixth consecutive year of doubledigit returns. Since the start of the emergingmarkets bond rally in 1999, this category’s average annual return of 15% Tops those of virtually all fixed income and equity categories. Clark: University of Evansville Emerging Markets Bond Average* 2004 YTD (%) 3-Year Return (%) 5-Year Return (%) Expense Ratio (%) *Source: Morningstar 10.65 17.51 15.22 1.00 (accessed 2/18/2005) Clark: University of Evansville Global Diversification If investors are concerned about the classic definition of risk-the volatility of a portfolio – they can reduce risk by holding more bonds, not by changing the composition of their equity allocations. Clark: University of Evansville Emerging Markets Transparency  Legal and Regulatory Framework  Liquidity  Transparency ……………..Increasingly Integrated!  Clark: University of Evansville Questions? Clark: University of Evansville Conclusion….. Clark: University of Evansville Whatever their Objective…. Clark: University of Evansville Investment Strategic Review Clark: University of Evansville