Banque Degroof Luxembourg S.A.

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Banque Degroof Luxembourg S.A.
December 2004
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Generating excess returns Some considerations
(1)

• Alpha creation and benchmarks
• Alpha is excess return not explained by market
  risk
• Excess return often pretended to be an alpha
• What about global balanced portfolios ?
• Benchmarks are composed of different asset
  classes (several market risks)
• Few managers (43) can distinguish between alpha
  and beta returns2
• Portfolio performance determinants
• Asset Allocation contributes to 90 to 951 to the
  explanation of portfolio performances
• Market Timing and Individual Investments
  Selection contribute marginally

1  Determinants of Portfolio Performance II An
Update.  Brinson, Hood and Beebower
2  New Sources of Return.  JPMorgan
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Generating excess returns Some considerations
(2)

• Is risk remunerated ?
• Market Risk Risk premiums tend to be delivered
  on the long run
• Active Risk Is a zero sum game with few
  winners
• E( r) RF RP
• Focus on Asset Allocation decisions and strategic
  deviations
• Markets are mostly efficient, but .
• some segments of the markets are less so
• Small Capitalisation Stocks
• Emerging Markets
• Inflation Linked Government Bonds

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Generating excess returns Some considerations
(3)

• Stock market is mostly efficient, but .
• Some segments of the market are less so
• Small Capitalisation Mid Capitalisation stocks
• Emerging Markets

1 Lipper last 15 years ending 31 december 2003
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Asset Allocation Stocks

• Overweight stocks VS bonds

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Asset Allocation Bonds

• Underweight bonds and prefer cash or
  alternative investments

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Asset Allocation Alternative Investments

• Allocate some money to low risk alternative
  multi-asset managers alternative
• funds of funds (hedged in )

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2. Within asset classes

• Selection level
• Small Cap Stocks VS Large Cap Stocks
• Risk Premium
• Liquidity
• Less analyst coverage
• Asset Managers can add alpha
• Emerging Markets Stocks VS developped stock
  markets
• Risk Premium
• Liquidity
• Less analyst coverage
• Higher potential GDP growth
• Regional Emerging Markets Asset Managers add
  alphas
• Inflation linked VS governement bonds

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LT Small Cap stocks deliver excess return over LC
Source Aswath Damodaran
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Stocks Relative valuation between SC and MSCI

• but we stay neutral in Small Capitalisation
  stocks for the time being

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Stocks Attractive valuations for emerging
markets stocks

• despite recent outperformance, we still favor
  emerging markets stock markets

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Bonds Expected inflation and Real Yields

• Overweight Indexation linked bonds
• Stay neutral of credit risks and out of
  foreign bonds

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Benchmark, Strategic deviations and present
allocation