Thursday, February 28, 2013

Safe Investments?

Said a strategist, airing his views
On central bank rumors and news:
"You've booked every gain
And best not retain
Your bonds, which are certain to lose."

Sometimes you hear something interesting at one of those presentations that investment advisors love to arrange. On Wednesday evening, Dr. Goose was a guest of Marc Leibowitz at Oppenheimer & Co. in Florham Park, New Jersey, and the featured speaker was Matthew Murphy, a global portfolio specialist at Eaton Vance. Unlike the standard investment company approach of managing against benchmarks (such as the S&P 500 or JP Morgan bond indices), Eaton Vance manages expected returns against expected risks, and they are judged on their Sharpe ratios; i.e., the ratio of return to volatility. The most striking manifestation of this approach is a complete disregard of benchmarks and traditional, "prudent man" asset class allocations, in favor of a top-down evaluation of expected risks and returns, with allocations made accordingly.

This means, for example, that Mr. Murphy's portfolios would not have risk-averse investors, or those who will soon need liquidity, in US Treasuries, because of the imminent expected losses in that asset class. The Fed's zero interest rate policies have pushed their yields down and their prices up as far as they will go, so the expected distribution of returns is asymmetric, with almost no upside but a large downside, as the Fed eventually reverses its quantitative easing programs and raises rates again.

So where is Eaton Vance bullish? Mr. Murphy extolled the economies and, by extension, the currencies and government bonds, of Serbia, Sri Lanka and Uruguay. In all three countries, the firm takes note of dramatic, fundamental improvements to economies that had been held back by civil or political strife, and where foreign investment is expected to increase, boosting the respective values of the dinar, rupee and peso. In the meantime, rates on their short-term government debt are in the 9% range, offering some cushion against the risk of loss. It's an interestingly contrarian perspective on markets that most people would consider too risky to touch. In the meantime, be careful with those T-notes!

Disclosure: Dr. Goose is not invested in any of the aforementioned assets, including the Eaton Vance Global Macro Absolute Return Advantage Fund; treasury bills of Sri Lanka, Uruguay or Serbia; or tea leaves, beef processing or trans-Balkan toll roads.


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