In Defense of a Structured and Disciplined Approach to Active Portfolio Management in Int'l Equities
The period since the financial crisis has been unprecedented in both the duration of the bull market but also the extreme low levels of volatility. As John Authers of the Financial Times recently pointed out, 2017 was the ‘most serenely positive year for world markets in history’.
The MSCI World index delivered a positive return every month of the year for the first time ever, while the MSCI EAFE index gained ground in ten out twelve months and returned -0.18% and -0.04% in the other two, for a compounded annual return of +25.0% in US dollars.
Chart 1: MSCI EAFE MONTHLY RETURNS (%) 2017
Chart 2: MSCI EAFE VOLATILITY- ROLLING 5-YEAR: 1975-2017
As chart 2 shows, central bank balance sheets have expanded to three times their size before the global financial crisis and are in aggregate still anticipated to expand in 2018. It is probable that they will contract at some point in the coming years and it is unclear what the consequences will be. We do however envisage that even a gradual shift to a more normal interest rate environment will over time lead to rising volatility and fairer pricing of risk.
We would argue that both the elongated period of market appreciation and the low volatility are, to a large extent, a result of the ultra-loose monetary policies that have been pursued globally. This sustained period of negative real interest rates has undoubtedly created many distortions, not least in equity markets.