GMO’s Inker, Risk Parity Critic, Asks ‘What the *&%! Just Happened?’

(July 24, 2013) - June—or rather the May 22 through June 24 period—was an odd stretch for markets, as GMO's co-head of asset allocation Ben Inker pointed out in his latest investor note.

"The S&P 500 lost 5.6%, MSCI EAFE lost 10.1%, MSCI Emerging fell 15.3%, the Dow Jones/UBS Commodity index fell 4.5%, US 10-year treasuries fell 4.4%, and the Barclays US TIPS index fell 7.1%. For good measure, the JP Morgan Emerging Debt Global index fell 10.8%, the German 10-year Bund fell 5.2%, the UK 10-year gilt fell 3.4%, and the Australian 10-year bond fell 6.5%."

While stocks and bonds have tended to show negative correlation in the last decade, most listed asset classes seemed to fall in concert from late May into early June.

The absolute return isn't what troubled Inker, but rather the question of risk.

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"For those schooled in thinking that the only 'risks' that matter for investors are growth shocks and inflation shocks, it's significantly more than just weird," Inker wrote. "To anyone of that mind, it's a bit of a soul-searching moment, and it forces you to either treat the episode as a one-off event that will hopefully not happen again anytime soon or as a challenge that requires you to rethink your risk model."

Valuation risk—the risk associated with the discount rate on an investment rising—was at the core of the recent across-the-board bear market, according to GMO. Since 2009, essentially every asset class has been bid in due low return expectations on cash. Then, Inker argued, Ben Bernanke removed that expectation by announcing a possible tapering of the Federal Reserve's quantitative easing program.

"May's shock to the real discount rate came not because inflation was unexpectedly high or because growth will be so strong as to lift earnings expectations for equities and other owners of real assets," Inker wrote, but rather because of Bernanke's signaling the end of forced low rates, or "financial repression."

"And because financial repression has pushed up the prices of assets across the board and around the world," he concluded," there is unlikely to be a safe harbor from the fallout, other than cash itself."

Read Inker's full note here.

(July 24, 2013) – Is there nothing Danish national pension fund ATP cannot do? Its private equity arm has been ranked as one of the three that most consistently outperform their sector by data monitor Preqin.

ATP Private Equity Partners is one of two Danish firms-NorthSea Capital is the other-that sit alongside Morgan Stanley Alternative Investment Partners as the fund of fund managers that most consistently beat their peers. All three firms’ average quartile ranking was a perfect 1.00.

Preqin produced the rankings as part of its 2013 performance analysis and considered only managers that had launched at least three funds into the same sector before 2011.

Inﬂexion, Veritas Capital, Vista Equity Partners, and Wynnchurch Capital Partners were at the top of the table for buyout funds, while in the venture capital sector, there were three leaders of the pack with a perfect 1.00 score for average quartile ranking: Benchmark Capital, Pittsford Ventures Management, and Sequoia Capital.

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There is a significant spread between the performance of individual funds, with a particularly large gulf between the returns generated by the best and worst performing funds, according to Ignatius Fogarty, head of private equity products at Preqin. “There is clear evidence to suggest that managers of top-tier funds are more likely than their peers to continue to produce top-performing funds in the future, though we must note that past performance is not a guarantee of future success.”

Some 16% of managers of bottom quartile funds subsequently improve and manage top quartile successor funds, but many more do not, Fogarty said, adding that while track record was a very important component of analysing a fund, each should be judged on its own merit.

To access the full, and regional, rankings click here.