Investors Warned to Reconsider Concentrated North American Stock Portfolios in 2017: ReSolve Asset Management
Rare confluence of political and monetary conditions implies exciting prospects for global tactical managers over next three to five years.
Toronto, Canada, January 24, 2017 (Newswire.com) - ReSolve asset Management, a Toronto-based leader in rules-based, globally diversified investment strategies, today released their annual report entitled “ReSolve Asset Management: 2016 Year-End Review.”
According to the report, there are three important concepts all investors need to keep in mind as they move into 2017:
- 2016 was a particularly unstable year for global politics
- North American stock valuations remain extremely elevated, and
- Stock picking cannot overcome challenges from asset allocation.
“We don’t often comment on political or monetary matters because it’s tough to quantify how social instability impacts investing decisions,” says ReSolve President Michael Philbrick. “Moreover, markets typically position appropriately in anticipation of political outcomes. But it’s fair to say that there was no shortage of unforeseeable events last year. From Brexit to Trump’s election, it was a year with many unexpected twists and turns, made more challenging by the fact that markets were repeatedly caught wrong-footed.”
The report outlines how political shocks have the effect of unsettling investors by confusing their expectations about the future. This in turn creates a volatile, consolidating environment that undermines the benefits of diversification, and rewards investors who happen to concentrate in “winning” asset classes.
“We’re not market timers, and markets can certainly keep rising from here,” notes Managing Partner Rodrigo Gordillo, “But on top of this social environment investors also have to consider that valuations remain extremely elevated.” According to data from Leuthold, the U.S. stock market is currently the third most expensive in the world, as measured by the cyclically-adjust price-to-earnings ratio, or CAPE. Canadian stocks rank eighth, putting both in the top quartile. According to Gordillo, “Yes, North American stocks had a lottery-like winning outcome in 2016, but they’ll continue to face serious headwinds moving forward. The prudent move is to stop buying lottery tickets and thoughtfully diversify.”
Unfortunately, rather than diversifying, many investors attempt to overcome the problem posed by valuations via security selection (or stock-picking). But the report warns against this. “It’s about where you invest, not which stocks you invest in,” says ReSolve CEO Adam Butler. According to the report, for the three years ending December 31st, 2016, the most skilled (95th percentile) international and emerging market equity managers trailed the least skilled (5th percentile) U.S. equity managers by 1.5%. “If the best stock pickers overseas can’t beat the worst the U.S. has to offer, that’s saying something about the futility of stock-picking.”
The message, according to ReSolve: Even superb stock-picking cannot overcome challenges from wrong-footed asset allocation.
The firm expects a reversal of fortune for 2017 and beyond. After seeing similarly troubling circumstances in 1994 and 2004, globally-diversified tactical strategies had excellent rebounds in both 1995-6 and 2005-6. Assuming a slightly calmer and more stable political and economic environment in the coming year, ReSolve expects that investors who focus on global diversification and real-time adaptation stand a very good chance of being rewarded for their thoughtful commitment.
About ReSolve Asset Management:
ReSolve Asset Management delivers ETF Managed Portfolio Solutions focused on global asset allocation. The firm stands for rules-based adaptive portfolios prioritizing diversification and downside protection for strong, stable returns through most market environments. ReSolve serves advisors and institutions in Canada, and advisors, institutions and individuals in the United States. To learn more about our offerings, including SMA, ETF and ReSolve Online Advisor. To learn more about our research methods, visit investresolve.com
About ReSolve’s Solutions:
ReSolve offers several research-based investment solutions. ReSolve’s Global Risk Parity strategy prioritizes diversification and risk balance for resilient performance across most economic environments. The more dynamic Adaptive Asset Allocation strategy harnesses the “premier anomaly,” momentum, to consistently reorient portfolios toward the world’s strongest trends, while minimizing the risk of large losses. All of ReSolve’s rules-based strategies are grounded in intuitive explanations about how markets work, and informed by the most rigorous academic research available.
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Source: ReSolve Asset Management
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