How do I Maximize the Consistency of my Return?

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¿Qué podemos esperar de los mercados en los próximos meses?
Photo: Colin Moore, director global de Inversiones de Columbia Threadneedle Investments.. How do I Maximize the Consistency of my Return?

Colin Moore, Global Chief Investment at Columbia Threadneedle Investments, discusses what was behind the volatile first quarter, where he sees opportunities and risks for the remainder of the year, and why he thinks investors should focus on maximizing consistency of returns.

What is your outlook for financial markets for the remainder of the year?

I wouldn’t say there can’t be positive returns in equities, but I don’t think the return relative to the volatility is going to be a particularly good trade-off. Investors need to understand that just getting a positive return isn’t enough if they have to take on too much uncertainty to get there. When there is volatility in the markets, investors often don’t behave well. They sell at the wrong point and buy at the wrong point, which is driven by their emotional response. Similarly, a lot of areas in fixed income don’t look particularly cheap to me. You will probably get the coupon in a number of areas, which is not particularly exciting, but at least the volatility will probably be less. In this challenging environment, I think the question investors should be asking is “How do I maximize the consistency of my return?” rather than “How do I maximize my return?”

What are some strategies that investors can use to maximize consistency of their returns?

Diversification is the standard strategy, but the mistake many investors make is assuming that if they own a lot of things, they’re diversified. What we’ve learned, particularly through the last crisis, is that a lot of things are diversified when you don’t need them to be, and when you need them to be diversified, i.e. in a crisis, they’re not. They act together.
With more study and analysis of how to get proper diversification, investors can pursue opportunities beyond conventional asset classes. These may include alternative investments and accessing the futures market to hedge exposure to conventional asset classes. With help from their financial advisor, investors can implement strategies designed to generate reasonable returns while reducing overall portfolio volatility. I strongly recommend that we focus on ensuring that our clients are properly diversified.

What impact did the US Federal Reserve have on financial markets?

The Fed has been involved in extraordinary monetary policy for some time. I believe the first rounds of quantitative easing were necessary for reducing risk and stabilizing the financial system. However, I would argue that some of the subsequent elements of Fed policy were unnecessary and, in isolation, relatively ineffective in stimulating growth. The problem is that we did not see the appropriate response on the fiscal side of the economy, and, certainly, politicians failed to come forward with a comprehensive plan. That left the Fed trying more and more extraordinary measures with less and less impact. Last December’s rate hike shocked people, but I think it was the right thing to do, and I hope they raise rates at least one more time this year. Normalizing monetary policy will send the message that we no longer need extraordinary measures. Lower rates won’t make you spend money if you think there’s a crisis going on. But if you think the economy is relatively normal, then low rates may encourage you to spend on your business or yourself.

After a dismal start to the year, financial markets made a tremendous comeback, with US equities ending the quarter higher. How did we get there?

When there’s a lot of negative volatility in the marketplace, it’s usually because there’s a lot of fear. Expectations of growth were too high, and disappointing news caused investors to rethink those expectations. Then they became overly fearful that the world is going to melt down. As that fear is removed, markets bounce back. We believe that we will continue to see the modest economic growth rate we’ve been predicting for many years. In today’s low, slow growth environment, we’re going to have periods of over- expectation and over-fear. We’re going to have to learn to cope with that.

Do you think the market’s reaction to a slowing Chinese economy was correct?

It was good that the market began to realize that the transition of the Chinese economy would take longer and probably be less even than some had forecast. China is making a big transition from an investment, project-led economy to a better balance between that and the consumer. Like a supertanker turning around, the transition will take time, and it’s unlikely that both components will move evenly. But the market reaction to China, at times, has been exaggerated, partly because we’ve become overly reliant on China as an engine for world economic growth. Japan and Europe are barely growing, and the US looks to be on its current 2% growth trend for a long time.

We saw more central banks pursue a negative interest rate policy in Q1. What do you think of this trend?

I believe the negative interest rate regime is dangerous, and I don’t think it creates the right behaviours. While a negative interest rate policy should encourage banks to lend more, it does nothing to increase demand for money. In fact, the messaging around negative interest rates is that the economy could be facing a crisis. So while the amount of money available may increase, I don’t think the demand for money will change, materially. I think, ultimately, it fails. In the interim the policy is bad for savers and for financial institutions such as insurers.

Why haven’t low energy prices delivered a bigger boost to growth?

It’s been something of a conundrum for me. While I believe low energy prices are, on balance, a positive for the global and US economies, it’s not all good news. In my observation, consumers want to see if low energy prices persist before they change their spending patterns. Now that these low prices have been with us for a while, we hope to see people spending that extra money as they feel more confident that they can rely on it.

The world seems to be getting more dangerous by the day. What are the implications for markets around the world?

Geopolitical risk is ever-present, and it certainly looks like it is escalating. However, there is a major difference between how markets react and how human beings react to geopolitical tension. As investors, we need to differentiate between geopolitical risks that create short-term volatility versus those that change the direction of markets
if it’s determined that one or more of those three factors is involved.

Jean-Pierre Mustier, is Appointed New CEO at UniCredit

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UniCredit designa a Jean Pierre Mustier como nuevo consejero delegado
CC-BY-SA-2.0, FlickrPhoto: m.krema . Jean-Pierre Mustier, is Appointed New CEO at UniCredit

On June 30th, the Board of Directors of UniCredit SpA has co-opted Jean Pierre Mustier and unanimously approved that, starting from next 12 July, he will take on the position of CEO in replacement of Federico Ghizzoni.

One of his most important tasks in his new role will be to decide and execute on the fusion of Pioneer Investments with Santander Asset Management. Operation which, according to Reuters, will no longer happen once Ghizzoni left. The merger would create one of Europe’s leading asset managers with over 400 billion euros in AUM.

According to a press release, the Board Chose Mustier because of his international profile, the high quality of his professional skills as well as the excellent understanding of international financial services and the accrued deep knowledge of the Group structure he has.

Mustier, 55, began his career at Société Générale where he held various positions, primarily within the Corporate & Investment Banking from 1987 to 2009. In 2003 he was appointed as Head of the Société Générale’s Corporate & Investment Banking Division and member of the bank’s Executive Committee. Afterwards, from 2011 to 2014, he joined UniCredit Group as Deputy General Manager and Head of Corporate & Investment Banking Division. Currently he is partner at Tikehau Capital, an investment management company and member of the Board of Directors of Alitalia.

In compliance with applicable regulations, the appointment of Mustier as CEO shall be assessed by the ECB.
 

Introducing Colony NorthStar, Equity REIT With $58 Billion of Assets Under Management

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El REIT Colony NorthStar nace con 58.000 millones de dólares en activos, de la fusión de NorthStar AMG, Colony Capital y NorthStar Realty Finance
CC-BY-SA-2.0, FlickrPhoto: Guilhem Vellut . Introducing Colony NorthStar, Equity REIT With $58 Billion of Assets Under Management

NorthStar Asset Management Group, Colony Capital, and NorthStar Realty Finance have announced that they have entered into a definitive merger agreement under which the companies will combine in an all-stock merger of equals transaction to create a real estate and investment management platform.

The combined company will be named “Colony NorthStar, Inc.” The transaction is expected to close during the first quarter of 2017, subject to customary closing conditions, including regulatory approvals, and approval by the NSAM, Colony and NRF shareholders.

Upon completion of the transaction, NSAM shareholders will own approximately 32.85%, Colony shareholders will own approximately 33.25% and NRF shareholders will own approximately 33.90% of the combined company on a fully diluted basis. NSAM shareholders will also receive, in addition to its regular quarterly dividend, a special cash dividend equal to $128 million, which represents a one-time distribution of excess NSAM taxable earnings and profits.

Upon closing of the transaction, Thomas J. Barrack Jr. will be Executive Chairman of the Board of Directors of Colony NorthStar, David Hamamoto will be Executive Vice Chairman, and Richard B. Saltzman will be Chief Executive Officer.

The transaction creates a global, diversified equity REIT with $58 billion of assets under management, led by a seasoned management team with access to proprietary deal sourcing and a significant track record as a global investor, operator and asset manager.

The portfolio has a concentration in scaled verticals across geographies, property types and capital stack positions, consisting primarily of owned real estate.

The companies have estimated an approximately $115 million in total annual cost synergies, consisting of approximately $80 million of cash savings and approximately $35 million of stock based compensation savings, expected to be realized post-closing.

Hong Kong and Switzerland Ahead of the United States in the Competitiveness Ranking

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Hong Kong y Suiza superan a Estados Unidos en el índice de competitividad global
CC-BY-SA-2.0, FlickrPhoto: Barbara Willi . Hong Kong and Switzerland Ahead of the United States in the Competitiveness Ranking

The USA has surrendered its status as the world’s most competitive economy, which it has led for the past three years, after being overtaken by China Hong Kong and Switzerland, according to the IMD World Competitiveness Center Ranking.

The 2016 edition ranks China Hong Kong first, Switzerland second and the USA third, with Singapore, Sweden, Denmark, Ireland, the Netherlands, Norway and Canada completing the top 10.

Professor Arturo Bris, Director of the IMD World Competitiveness Center, said a consistent commitment to a favorable business environment was central to China Hong Kong’s rise and that Switzerland’s small size and its emphasis on a commitment to quality have allowed it to react quickly to keep its economy on top.

“The USA still boasts the best economic performance in the world, but there are many other factors that we take into account when assessing competitiveness,” he said.

“The common pattern among all of the countries in the top 20 is their focus on business-friendly regulation, physical and intangible infrastructure and inclusive institutions.”

A leading banking and financial center, China Hong Kong encourages innovation through low and simple taxation and imposes no restrictions on capital flows into or out of the territory.It also offers a gateway for foreign direct investment in China Mainland, the world’s newest economic superpower, and enables businesses there to access global capital markets.Taiwan, Malaysia, Korea Republic, and Indonesia have all suffered significant falls from their 2015 positions, while China Mainland declined only narrowly retaining its place in the top 25.

The study reveals some of the most impressive strides in Europe have been made by countries in the East, chief among them Latvia, the Slovak Republic and Slovenia. Western European economies have also continued to improve, with researchers highlighting the ongoing post-financial-crisis recovery of the public sector as a key driver.

Meanwhile, 36th-placed Chile is the sole Latin American nation outside the bottom 20, while Argentina, in 55th, is the only country in the region to have improved on its 2015 position.

 “One important fact that the ranking makes clear year after year is that current economic growth is by no means a guarantee of future competitiveness.” Added Professor Bris.

 

 

Brexit: Implications for Asia Stock Markets

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Implicaciones del Brexit para las bolsas asiáticas
CC-BY-SA-2.0, FlickrPhoto: Gilhem Vellut. Brexit: Implications for Asia Stock Markets

The recent announcement afirming the U.K.’s vote to exit the European Union has many ramifications—many of which affect millions of people in a negative way. Some refer to Friday’s announcement as a Black Swan event. Regardless of how the event is characterized, the fact is that the exact implications are largely unknown, the potential for a domino effect is real, governments and companies will need to re-think strategy and individuals will be impacted. Hopefully we will have more clarity in the days ahead, but it is always dificult to predict macro influences or investor sentiment. What is more apparent to us is that good businesses exist regardless of macro movements.

Reactions since Announcement

The FTSE 100, a cap-weighted index traded on the London Stock Exchange, has suffered signi cantly— down 15.79% in USD terms in two trading days since the announcement.

Initially, Japan certainly was Asia’s worst performing stock market with the Nikkei down the day after the announcement, almost 8% in local terms and 4.8% in USD terms. Japan was affected by worries that a stronger yen would negatively impact future earnings, especially for global exporters. The Japanese yen hit 100 vs. the U.S. dollar early in the trading session which sparked a stronger-than-anticipated equity reaction. The Nikkei recovered slightly overnight bringing its two day loss in USD terms to -2.10%.

The worst performing equity sectors within Asia ex Japan were energy, industrials and materials while the best performing sectors were consumer staples, health care and utilities. Asian currencies generally outperformed the Euro and GBP with export/commodity related currencies performing worst (Korean won, Australian dollar, and Malaysian ringgit). Interestingly, local Chinese shares, represented by the Shanghai Composite performed relatively well, down less than 1% in USD terms since the Brexit announcement.

Matthews Asia Investment Team Thoughts

A combination of an unexpected result not priced into markets and a likely prolonged period of uncertainty were the main negative drivers of markets across all asset classes. Risk-off sentiment could continue in the short term and because Brexit negotiations are expected to extend for many months, a period of ongoing uncertainty will keep markets unsettled for quite some time. That said, we also expect that global central bank coordination is ready to add stimulus as needed which should add liquidity— potentially mitigating market volatility.

In an already slow growth environment, added uncertainty will not help Europe’s fragile recovery. Prolonged uncertainty will cause a slow-down in investment, capex and European growth which in turn will increase the length of the current credit cycle, spur further central bank stimulus and liquidity, and ultimately drag out the “low growth for longer” thesis. In this scenario, we envision that cyclical sectors—especially those exposed to the EU—are most at risk. Winners could include defensive sectors and those that focus on domestic demand. Within Asia, we see both potential winners and losers if the turmoil in Europe continues to unfold.

Portfolio Implications

We believe successful investing in Asia includes an increased focus on domestic demand and regional growth— nding businesses that are less dependent on global growth and more dependent on regional growth of middle class consumers. And although growth may be increasingly dificult to find in Europe, our conviction for the long-term growth of Asia remains intact. We believe the ability to capture that growth—through domestic demand oriented businesses, attempting to mitigate macro influences wherever possible—have never been more important. While we don’t yet know what the long-term ramifications are for Europe and the U.K., we can be a little more certain about the future for Asia’s economy and its growing contribution to global growth.

David Dali is Client Portfolio Strategist at Matthews Asia.

Eaton Vance Launches a Multi-Asset Credit Fund

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Eaton Vance lanza una estrategia multiactivo de crédito
CC-BY-SA-2.0, FlickrPhoto: Giuseppe Milo. Eaton Vance Launches a Multi-Asset Credit Fund

Eaton Vance Management Limited. (EVMI), a subsidiary of Eaton Vance Management, today announced the launch of Eaton Vance (Ireland) Multi-Asset Credit Fund, a sub-fund of Eaton Vance Institutional Funds Plc, which is available to investors in the UK and Ireland, with forthcoming registration in other jurisdictions. 

In an uncertain market for traditional core fixed income asset class returns, this strategy seeks to provide investors with broad exposure to the global sub- investment grade credit markets, principally through higher yielding credit assets including global high yield bonds and floating-rate loans. Up to 40% of the fund’s assets may be allocated to opportunistic and risk-reducing fixed income asset classes. The strategy will also be available to investors as a customisable segregated mandate.

The Fund’s co-portfolio managers are Jeffrey Mueller, Vice President, Justin Bourgette, CFA, Vice President, and John Redding, Vice President. The Fund will be managed in a way that draws on Eaton Vance’s breadth of investment expertise and capabilities, based on the ‘intelligent integration’ of top-down and bottom-up inputs to optimise portfolio construction.

Payson Swaffield, Chief Income Investment Officer of Eaton Vance Management, commented: “Eaton Vance is an experienced manager of investments across the global credit spectrum. Bringing our multi-asset Credit capability to investors in a QIAIF structure is a natural evolution of our market leadership position in leveraged credit. I am confident that the combination of Jeff, Justin and John will allow us to provide an attractive strategy for investors seeking higher yields and strong, sustainable returns.”

The Fund is a regulated, Irish domiciled qualifying investor alternative investment fund (“QIAIF”) and complies with the Alternative Investment Fund Managers Directive (“AIFMD”).

Careful With The Brexit: Not To Confuse The Local Economy And Politics With Markets

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Brexit: Es importante no confundir la economía y la política local con los mercados
CC-BY-SA-2.0, FlickrPhoto: D Chris. Careful With The Brexit: Not To Confuse The Local Economy And Politics With Markets

The United Kingdom’s decision to leave the European Union has begun to reverberate around the world.

Prime Minister Cameron has announced he will resign in October, around the time of the next Conservative Party annual conference. Only after a new prime minister is in place will the UK trigger Article 50 of the Lisbon Treaty and start the two-year process of negotiating its exit from the E U.

From a credit perspective, the ratings agencies have made it known that the UK’s sovereign credit rating will be downgraded as a result of the decision to leave the European Union. Standard and Poor’s called the AAA credit rating ‘no longer tenable under the circumstances’. Moody’s called Brexit a credit negative for the UK and for other issuers in the country, citing a prolonged period of policy uncertainty that will likely dent investment flows and confidence. On an absolute basis, UK gilt yields may fall in the near term, but spreads could widen.

Central banks have made it clear that they stand ready to provide liquidity to financial institutions — and in some cases intervene in currency markets — amid volatile market conditions. Expect central banks to work together to suppress volatility. A rate cut by the Bank of England in July is increasingly likely, while the US Federal Reserve, as a result of the vote, is unlikely to hike short-term rates for the balance of the year.

Currency markets have borne the brunt of today’s volatility, with the pound falling by a record 11% against the dollar in the wake of the vote before stabilizing. Equity markets were hit hard at the open of trading on 24 June, with the FTSE 100 Index falling nearly 9%, but those losses moderated significantly as the session wore on. The moves have been relatively sensible, with the sectors most at risk in the short term — financial services and cyclicals — bearing the brunt of the pressure thus far. Ten-year UK gilts fell to a record 1% before stabilizing near 1.10% toward Friday’s close, while the 10-year US Treasury note tested record low yields, near 1.40%, this morning before rebounding to 1.57%.

This sort of environment can create opportunities for investors. We are long term in our focus, and we’re very careful not to confuse the local economy and politics with markets. We invest in international and global businesses, and stock prices act as a discounting mechanism. Some of the impacts of the Brexit vote may already be reflected in prices. Against this more volatile backdrop, long-term inefficiencies may emerge. There are great businesses that have been hit hard in the short term, and there are others where risks have increased substantially. This is the type of environment where long-term active managers would be expected to add value. After all, volatility should be our friend over the long term.

In fixed income, we continue to look for opportunities where valuations have become dislocated. We’re going through our names and sector exposures, deciding where we want to add or reduce risk. We’re not rushing, as we’re mindful of challenges around liquidity in the near term. We’re largely taking a wait-and-see approach, awaiting improved liquidity. We have already identified specific credits and sectors, so we can move quickly when the environment is conducive to adjusting portfolios appropriately.

Politically, it’s not over

As Michael Gove said during the Brexit campaign, many ‘have had enough of experts’. That sentiment is being felt far beyond the UK’s shores, notably within Europe and the United States. While the Brexit vote has brought a slight bit of clarity to the UK’s future relationship with the EU, it opens the door for a potential domino effect across Europe as populist movements gather strength. Investors wonder which countries will be next in the queue for an EU referendum of their own.

To sum up, it looks as though the UK’s decision to leave the EU could be the beginning of a large, protracted process in which dissatisfaction with the effects of three decades of globalisation is being expressed in ever more impactful ways. It bears watching to see if the trend accelerates, and what lasting impacts, if any, these political forces will have on companies around the world. Geopolitical conditions are ever shifting, but great businesses always seem to find a way to adapt and prosper over time. We suspect they will be able to weather this storm.

Pilar Gomez-Bravo, Fixed Income Portfolio Manager, and Ben Kottler, Institutional Equity Portfolio Manager – UK.

Investec Asset Management Appointed Iain Cunningham to its Multi-Asset Team

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Investec Asset Management incorpora a Iain Cunningham en su equipo de multiactivos
CC-BY-SA-2.0, FlickrPhoto: Iain Cunningham, Portfolio Manager in its established multi-asset team. Investec Asset Management Appointed Iain Cunningham to its Multi-Asset Team

Investec Asset Management has announced the appointment of Iain Cunningham as a Portfolio Manager in its established multi-asset team. Iain brings an extensive track record dedicated to multi-asset investment, most recently at Schroder Investment Management.

Iain Cunningham will join the firm’s multi-asset investment capability, reporting to Michael Spinks, co-Head of Multi-Asset Growth at Investec Asset Management. The range of solutions managed by the 31-strong team includes total return and relative return growth strategies, as well as defensive income.

Michael Spinks, co-Head of Multi-Asset Growth, commented: “We are excited about Iain joining the team given the asset allocation skills and experience that he brings with him.  In addition to portfolio management responsibilities, Iain will help to develop Investec’s multi-asset capabilities globally, with a specific focus on our long-standing relative return growth strategies.”

Iain Cunningham joins from Schroder Investment Management where he spent nine years in investment management roles within the multi-manager and multi-asset investment teams – he co-managed the Schroder ISF Global Multi-Asset Income Fund and was co-manager of the Global Multi-Asset Allocation Fund. Additionally, he managed Global Tactical Asset Allocation mandates; was instrumental in developing Schroders’ Multi-Asset Income franchise; and led currency research for the multi-asset team.

“With today’s low growth environment and uncertain economic backdrop, clients are increasingly looking to target investment outcomes based on risk and return”, said Spinks. “Having managed multi-asset portfolios for over 25 years, our core investment capabilities are firmly established, and Iain will play a key role in helping us to continue to seek strong results for our clients.

The Duarte Vasquez Group joins Bolton Global Capital

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El Grupo Duarte Vásquez se incorpora a Bolton Global Capital
CC-BY-SA-2.0, FlickrPhoto: Ines Hegedus-Garcia . The Duarte Vasquez Group joins Bolton Global Capital

Bolton Global Capital announced that the Merrill Lynch team of Tanya Duarte and Archibaldo Vasquez has joined the firm’s Miami office. The team manages $225 million in client assets with $2.1 million in annual revenues operating under the name “Duarte Vasquez Group”.

As senior financial advisors with Merrill Lynch for the past 22 years, they have built a broad based international business serving high net worth clients predominantly from Mexico, Colombia, Dominican Republic and the US.  Prior to joining Merrill Lynch in 1994, they both worked for 10 years at Chase Private Bank as Team Leaders for various Latin American markets.

“We are honored to have such well respected professionals affiliate with our company and look forward to supporting the continued growth of their wealth management business.” Arturo Vasquez will be responsible for client support operations where he has worked at Morgan Stanley for the past 3 years prior to joining Bolton and with BNP Paribas for 2 years.

With the affiliation of the Duarte Vasquez Group, Bolton continues to establish its position as a premier destination for top wirehouse teams transitioning to the independent business model. Over the past 3 years, the firm’s Miami office has recruited more than a dozen major teams from Merrill Lynch, Morgan Stanley, RBC Wealth Management, Citi Private Bank and HSBC Private Bank. During the 3 quarters ending in June 2016, Bolton has added teams with total AUM of more than $1.3 Billion.  The firm has leased additional space at 801 Brickell Avenue to accommodate the growth of its business.

Why Investors Overreact to Market Corrections?

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¿Por qué los inversores sobrereaccionan a las correcciones del mercado?
CC-BY-SA-2.0, FlickrPhoto: Roman Lashkin . Why Investors Overreact to Market Corrections?

The short answer for Bernie Scozzafava, Diversified Fixed Income Portfolio Manager, and Dan Codreanu, Senior Diversified Fixed Income Quantitative Analyst at Eaton Vance, is that it’s human nature, irrational though it may be in many cases:

  • Loss aversion: Behavioral finance tells us that fear trumps greed. In other words, most investors dread losses more than they desire gains.
  • Recency bias: Recent events trigger hasty decisions, even when such events contradict longer-term trends or investment objectives.
  • Overreaction bias: Most investors place too much emphasis on negative, sensational news headlines, leading to indiscriminate selling.
  • Herd behavior: Investors take an “everyone is selling” mentality and follow suit because they fear being the last one to sell.

According to Eaton Vance experts, these all-too human tendencies were exacerbated by the 2008 credit crisis, which left many investors permanently scarred. This debacle, caused by massive losses on subprime loans, sparked the worst market collapse in more than 75 years. Although nearly eight years have passed since then, the carnage still remains fresh in investors’ minds, with many fearing that the next recession and market downturn will be just as bad.

“More often than not, such fears are unfounded. For example, there is growing concern (and press coverage) these days that bank loans to the energy sector could pose a serious threat to the economy and financial system – even though banks generally do not have excessive E&P exposure, are better capitalized and adhere to stricter counterparty risk measures than they did prior to the 2008 crisis”, point out Scozzafava and Codreanu.

Investors with long time horizons are best positioned to tolerate market volatility and earn attractive returns over time, but instead, many behave irrationally and sell during corrections to limit their short-term losses.

“Market volatility and corrections are many investors’ biggest fear. However, we believe a bigger fear should be missing out on the market recoveries that typically follow the corrections. Our research shows that when disciplined, data-driven investing gives way to biased, emotion-driven investing, portfolio performance suffers”, conclude.