Research and Commentary

Since late 2012, coinciding with the election of reformist Prime Minister Shinzo Abe, Japanese equity markets have surged nearly 70% (in local currency) in the past two years. Yet ‘Abenomics’, as the set of ambitious and bold fiscal and monetary policies pursued by the Abe Administration have been dubbed, have thus far failed to move the appetites of Japanese household savings. But there is reason to believe that Japan is on the precipice of reordering its domestic savings structure as soon as this year, with potentially significant implications for its equity markets.

There is no shortage of prognostication on which assets/ strategies will be most/least impacted as the Fed and the BOE become less accommodative, and how they will be affected. How we answer both questions will be critical to performance over the next year or so. This paper evaluates the likely path and impact of Fed tightening with specific focus on the counterbalancing effects of asynchronous monetary policies globally and the likely impact of Fed tightening on EM risk assets.

In the first half of 2014, the MSCI Frontier Markets Index substantially outperformed its actively managed peer group. The degree of this outperformance is deeply ahistorical for major equities classes and poses several implications for manager selection and evaluation. This paper examines the unique structure of this market rally in an effort to better understand the frontier markets environment, assess the complicated interplay between index structure and performance measurement, and discusses how allocators should evaluate and respond to these special circumstances.

During a rather sobering January, several clients wondered whether we were maintaining our generally bullish sentiment on G3 equity markets discussed in our mid-month market outlook presentation. Thus far (January 30, 2014), that conviction has admittedly been severely tested with the Dow down 4.39%; the S&P 500 down 2.39%; the Russell 2000 down 2.09%; MSCI EAFE down 3.57% and Emerging Markets down by a whopping 6.61%. First, let’s recall the highlights of our 2014 strategy report:

In 2011, FIS Group published a research paper which analyzed the drivers of entrepreneurial (or smaller) manager outperformance in US equity strategies from 2006-2010.1 While the study illustrated out-performance for five out of seven long-only equity investment styles offered through smaller managers/strategies (based on assets under management (AUM)) relative to their larger manager peers, it also detected the apparent beginnings of diminishing excess returns to fundamental active equity management strategies in the post-financial crash period. The most marked erosion of return has been observed among active Large Growth and Large Core products. By the end of 2012, the S&P 500 Index had risen over 100% since the market bottom in March 2009; but as a class, U.S. Large Cap active managers have been underperforming the market benchmark with a tenacity that is troubling. The paper analyzes several key questions including:

The three to five years ending December 31, 2010 have challenged many active long only (and long-short) equity managers’ ability to produce alpha, particularly if their investment decisions are based on the intrinsic fundamental characteristics of individual stocks. As a manager of Entrepreneurial managers1 , the majority of whom employ this type of investment approach, FIS Group conducted research on the major factors driving the impairment of excess return observed over the last five years. Additionally, we examined whether the performance advantage of Entrepreneurial managers over their Established manager peers (by investment style and market capitalization) observed in our and others’ prior research had altered as a result of the changing macroeconomic and market environments. Our conclusions are as follows: