Swiss Finance Institute podcast

Swiss Finance Institute has recently begun to provide video podcasts (iTunes link) of its public events. These are definitely worth following. A good example is Attilio Meucci's presentation about State of the art in asset allocation: Diversification management, which I attended in Zürich last week. In it, he discusses his new unified measure of diversification, which offers interesting quant properties. The paper that the presentation is based on is also available online, as are the slides of the presentation.

Nordic strategy evaluation

You should have a look at this extraordinarily thorough and methodic assessment of the allegedly active investment strategy of the Norwegian Government Pension Fund NBIM, which was commissioned from the Ministry of Finance in the wake of heavy losses during the crisis. The academic authors came to a number of noteworthy conclusions:

• Their survey of current thinking about the Efficient Markets Hypothesis (EMH) suggests that EMH does not hold in practice, even though it is quite hard to consistently beat a market portfolio: "even modest levels of skill should lead to at least some part of the portfolio being actively managed".
• The authors found that the fund's active strategy contributed a small, but statistically significant outperformance. However, they attributed this outperformance not as much to the active strategy per se, but rather to the exposure to a number of financial market risk factors (especially liquidity and volatility) as often used in hedge fund replication models. The lion's share of the fund's performance arises from passive exposure, which is why they consider the fund not to be an actively managed portfolio in first approximation.
• Consequently, they recommend that effectively, a semi-active strategy be adopted which uses factor exposure as active bets rather than as an accidental byproduct of more conventional active strategies. 

Comparing NBIM's size, resources and sophistication with those of the overwhelming majority of players in the field should give pause for thought in applying those considerations to other cases.

X marks the spot

In the March edition of CFA Institute's EMEA Newsletter Connexions, I have a tiny piece about CFA Institute's recent response (all responses) to CESR's call for evidence on the use of a standard reporting format. We still have a long way to go.

The defenestration of Prague

Last week, the ECJ passed an interesting judgment in the case C-343/08 EU Commission vs Czech Republic. The Czech Republic argued that there wasn't any point in transposing a number of provisions of the directive as IORPs were not provided for in the Czech retirement system which only knows the first and the third pillar. The Court however did not share that existentialist line of argument and took the constructivist view that a second pillar may be introduced at any time, in which eventuality the rules required by the directive already need to be in place.

While the Czech position appeals to a layman's common sense rather better than the somewhat fundamentalist approach taken by the Court, one important aspect has escaped IPE's attention: The judgment includes a thinly veiled hint (paragraphs 63, 64) that the Court may find the Czech prohibition on IORP establishment in the country in breach with the Treaties' rules on free circulation. That in itself is a valuable signal.

It has barely begun

On Thursday, I attended a Goldman Sachs investment conference in Lucerne. Jim O'Neill, the firm's chief strategist, gave the keynote presentation containing an outlook for the world economy, which was surprisingly optimistic (this year's global growth rate is expected at 4.4% vs 3.9% consensus). To my question where deleveraging was in that picture, he answered that it wasn't because there is no reliable information about leverage available, and that we shouldn't trust anyone who claims to have it.

It appears to be more than a little cavalier to ignore a presumably major phenomenon simply because it is hard to measure. It is therefore very timely that MGI has just published a major report on debt and deleveraging. MGI looks at the buildup of debt at a per country and per sector level and distills four archetypal deleveraging scenarios from past episodes: Austerity, Inflation, Default and Growth. Unsurprisingly, they find that deleveraging has only just begun in a quite moderate way, as private sector debt reduction is compensated by increasing public sector debt.