Perspectives Blog

2015 Outlook — Same song, slightly different arrangement

Jeffrey Knight, CFA, Global Head of Investment Solutions and Asset Allocation | December 15, 2014

…lds around the world at historic lows, the comparison between stocks and bonds based on forward-looking expected returns has been very lopsided. Market returns in 2014 underscore the valuation advantage that equities offer. (Exhibit 1) Exhibit 1: In 2014, equities outperformed bonds again For this comparison, we use global returns to represent equities but only U.S. returns to represent bonds. This is an unfair comparison because the equity inde…

Holding multiple investments does not ensure better diversification

Columbia Management, Investment Team | April 23, 2014

…ons to effectively lower the risk in a portfolio. [For a detailed analysis, see our white paper, “Reducing risk: Absolute return and the pursuit of better diversification.”] This is why well-designed absolute return products — which seek positive expected returns through multiple return streams with consistently low or no correlation to equity or fixed-income markets — can be meaningful additions to traditional allocations, substantially enhancin…

Understanding the power of alpha

Matt Scales, CFA, Head of Product Development and Strategy | January 27, 2014

Sources of return – such as quality alpha – that are not structurally tied to the direction of markets can be a valuable tool for diversifying portfolios Market betas have a positive expected return but can be subject to long periods of poor performance Finding sources of return that do not rely on markets going up to make money is not easy, but it is worth the effort The term “alpha” (which until recently was relatively unknown) has become pa…

Finding the sweet spot — Value investing along the muni yield curve

Paul Fuchs, CFA, Portfolio Manager, Municipal Bonds | August 27, 2014

…ng an additional year until a bond matures. In the chart below we look at an illustration of roll-down. Expected return and percent of maximum expected return one-year horizon — unchanged yield environment Source: Bloomberg. The chart above plots the AAA municipal benchmark yield curve as of July 31, the expected total return over the next year for bonds maturing between two and twenty years and the percent of the maximum expected return each ma…

Q&A with Jeff Knight

Jeffrey Knight, CFA, Global Head of Investment Solutions and Asset Allocation | November 10, 2014

…d equity risk. However, we have to pay attention to the U.S. dollar because the stronger it gets, the weaker any return denominated in foreign currencies will be. We saw this very clearly in the third quarter, which we detail in our latest Investment Strategy Outlook.  But it goes deeper than that. Emerging market assets, even in local currency terms, tend to underperform in the midst of a strong dollar; so do commodity returns. Overall, it argue…

Don’t throw the baby out with the bath water – The case for long muni bond funds

Catherine Stienstra, Senior Portfolio Manager | January 29, 2014

…heap level of munis potentially represents a cushion against rising Treasury rates if muni/Treasury yield ratios return to historical levels. Exhibit 2: Barclays Municipal Bond Index calendar year returns Source: Barclays, December 2013. Past performance does not guarantee future results. It is not possible to invest directly in an index. Muni mutual fund outflows in 2013 exacerbated the steepening of the curve. Historically, when the yield curv…

Building better portfolios in a low return world

Anwiti Bahuguna, Ph.D., Senior Portfolio Manager | November 17, 2014

…, but as the economy normalizes so will interest rates. While we expect the bull market in equities to continue, returns will likely be far more modest over the next 10 years. For bonds we can expect returns in the range of 2%-3% going forward. For investors looking for higher returns, solutions require a non-traditional approach to portfolio construction and must emphasize flexibility. Today’s low return world presents challenges to investors m…