Global Asset Classes Research Articles

Does GMVP Strategy Reduce Risk? A Global Asset Approach

<p>This paper studies the out of sample risk reduction of global minimum variance portfolio. The analysis are drown from the discussions of Jagannathan and Ma (2003) regarding the risk reduction in US stock portfolios using portfolio constraints. We estimate the covariance matrix using the sample covariance matrix approach and derive optimal minimum variance portfolios considering upper/lower bounds and no restrictions. Results are shown under different revision frequency and transaction costs assumed. The data used are monthly indices of stocks, bonds, gold oil and spreads from 1996 until 2013. Unconstrained GMVPs result in the lowest out of sample variance, while unconstrained GMVPs of global bond portfolios performs the best in terms of risk reduction. Diversification through global asset classes result in a better strategy than international stock diversification regarding risk, as suggested by the literature.</p>

The financialisation of rental housing: A comparative analysis of New York City and Berlin

This paper compares how recent waves of private equity real estate investment have reshaped the rental housing markets in New York and Berlin. Through secondary analysis of separate primary research projects, we explore financialisation’s impact on tenants, neighbourhoods, and urban space. Despite their contrasting market contexts and investor strategies, financialisation heightened existing inequalities in housing affordability and stability, and rearranged spaces of abandonment and gentrification in both cities. Conversely cities themselves also shaped the process of financialisation, with weakened rental protections providing an opening to transform affordable housing into a new global asset class. We also show how financialisation’s adaptability in the face of changing market conditions entails ongoing, but shifting processes of uneven development. Comparative studies of financialisation can help highlight geographically disparate, but similar exposures to this global process, thus contributing to a critical urban politics of finance that crosses boundaries of space, sector and scale.

International Real Estate Review

The study tests the predictability of excess returns on four global asset classes that include Shariah-compliant (SC) real estate, SC stocks, conventional real estate and real estate investment trusts (REITs). Based on weekly excess returns from January 2001 to December 2010, our empirical results do not reject the hypothesis that Shariah compliance risk is significantly priced in the excess returns of a portfolio of the four global asset classes. Shariah compliance risk and real estate risk are mutually exclusive. Fund managers will only price one common Shariah compliance risk in a pure real estate portfolio that consists of SC real estate, conventional real estate and REITs.

Dynamic Risk Allocation with Carry, Value and Momentum

According to recent research, diversification across risk factors (or investment styles) proves to be more efficient than traditional asset class diversification. In this paper, we take the next step and show that it is economically worthwhile to combine risk factors in a dynamic manner, in a process that we call Dynamic Risk Allocation (DRA). Building a DRA portfolio by means of several unconventional heuristics adds robustness and intuition to the whole portfolio construction process.Our main finding is that risk factor allocation largely replaces traditional global equity and bond market premiums as well as allocation to hedge funds (in expected utility maximization sense). Hence we question the economic validity of the alpha-beta separation paradigm that currently prevails in the industry. We show that our results are robust to transaction costs and portfolio constraints. We analyse a global portfolio of 3 well-known risk factors: momentum, value and carry. Each risk factor is broadly diversified across 4 global asset classes and taken both in cross-sectional and time series contexts. We test our approach using 38 years of daily historical prices in a broad set of futures contracts and major FX rates.

Infrastructure: An Emerging Global Asset Class

Inflation-linked long-duration characteristics of infrastructure assets may be exactly what many pension funds need.

Performance of global listed infrastructure investment in a mixed asset portfolio

This paper seeks to examine global infrastructure investment performance compared with other global asset classes such as stocks, bonds, real estate investment trusts, property, hedge funds and private equity. The paper examines the level of correlation of infrastructure with the other assets classes largely reflecting the diversification potential of infrastructure within a mixed asset portfolio. Monthly return indices obtained from Thomson Reuters DataStream over a 10-year period (2001–2010) facilitated the examination of listed infrastructure investment return characteristics including average annual return, annual risk, Sharpe index, mean variance portfolio and maximum return portfolio. Efficient portfolio frontiers were computed using risk solver platform version 11. From a global perspective, investments in infrastructure show a robust comparative performance over the 10-year timeframe (2001–2010). The study is supportive of the argument that the inclusion of infrastructure in a mixed asset portfolio enhances investment performance. The role of global infrastructure in a multi-asset portfolio is shown to be more risk reduction rather than enhancement of return. From a practical viewpoint, the systematic allocation of between 10 and 17.63% of infrastructure into a global investment portfolio can significantly enhance diversification benefits for investors.

Relative Strength Strategies for Investing

The purpose of this paper is to present simple quantitative methods that improve risk-adjusted returns for investing in US equity sectors and global asset class portfolios. A relative strength model is tested on the French-Fama US equity sector data back to the 1920s that results in increased absolute returns with equity-like risk. The relative strength portfolios outperform the buy and hold benchmark in approximately 70% of all years and returns are persistent across time. The addition of a trend-following parameter to dynamically hedge the portfolio decreases both volatility and drawdown. The relative strength model is then tested across a portfolio of global asset classes with supporting results.

Global Real Estate Risk Index

1. Jun Chen 1. Head of financial modeling at Property & Portfolio Research, in Boston (MA 02108). (jun{at}ppr.info) 2. Peter Hobbs 1. Director of business management and head of European research at Property & Portfolio Research, in Boston (MA 02108). (peter{at}ppr.info) Despite ongoing political, economic, and financial uncertainties, the long-term trend of financial market “globalization” continues. This trend has been driven by equity and bond investments, but cross-border real estate investment has increased in recent years. Recent disaffection with stock performance means real estate is at the forefront of many investors' thinking and, increasingly, they are considering real estate as a global asset class. This article seeks to help measure and explain the relative risks of global real estate markets by providing a simple, objective measure of real estate risk based on three components: country, structural real estate, and cyclical real estate risks. Together these measures capture the key dimensions of risk and provide important insights for global real estate strategies. An investor's tolerance for various types of risk varies according to investment strategy. The authors conclude by showing how different combinations of types of risk provide different insights according to the perspective of the investor, whether they are “opportunistic,” “core,” or “debt focused.”

Global Asset Liability Management

Dynamic financial analysis (DFA) is a technique which uses Monte Carlo simulation to investigate the evolution over time of financial models of funds, complex liabilities and entire firms. Although of increasing popularity, the drawback of DFA is the dearth of systematic methods for optimising model parameters for strategic financial planning. This paper introduces strategic DFA which employs the only recently mature technology of dynamic stochastic optimisation to fill this gap. The new approach is described in terms of an illustrative case study of a joint university/industry project to create a decision support system for strategic asset liability management involving global asset classes and defined contribution pension plans. Although the application of the system described in the paper is to fund design and risk management, the approach and techniques described here are much more broadly applicable to strategic financial planning problems; for example, to insurance and reinsurance firms, to risk capital allocation in financial institutions and trading firms and to corporate investment and business development involving real options. As well as describing the mathematical and statistical models used in the case study, the paper treats econometric estimation, asset return and liability scenario generation, model specification and optimisation, system evaluation and historical backtesting. Throughout the system visualisation plays an important role.

Investing in Foreign Real Estate

Foreign real estate investing is risky, but careful attention to several elements will increase investors’ chances of success. Elements include a rational strategy and goals, knowledge of global asset classes, trustworthy local advice and research to reduce the information gap, patience and long-term preparation, and cautious selection of vehicles.This presentation comes from the Real Estate: An Alternative or Mainstream Asset? conference held in Chicago, Illinois, on September 13-14, 1994.