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Investment strategy based on reducing risk faces its own challenge – TheChronicleHerald.ca

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By Megan Davies and Maiya Keidan

NEW YORK/LONDON (Reuters) – A fund trading strategy that tracks hundreds of billions of dollars in assets and often gets blamed for exacerbating market selloffs is facing a challenge from the policy response to the pandemic. But fund managers said they are adapting, and new money is flowing in.

Most closely associated with investment funds such as Bridgewater Associates and AQR, the strategy, called risk parity, typically spreads risk over stocks, bonds and other financial assets, as against traditional 60-40 stock and bond portfolios where equities carry more risk. It uses leverage to magnify returns from lower-risk assets such as bonds.

But the U.S. Federal Reserve’s policy of keeping interest rates near zero in response to the coronavirus crisis has raised questions about the strategy. Bond prices, which move inversely to yields, have little room to rise and volatility has been generally low, which dulls Treasury bonds’ appeal, analysts and investors say.

Managers of risk parity assets said they are adjusting to the new reality, that the industry can thrive in a low-yield environment and investors can still benefit from the diversification it brings.

Bridgewater, which manages around $148 billion, told Reuters it has around 45 new commitments this year to invest money from existing and new clients. Many, it said, were in the $1 billion-plus range.

Investor demand has been “pretty constant,” said Bob Prince, Bridgewater’s co-chief investment officer, said recently.

Prince said his firm had reduced its exposure to Treasuries in favor of assets like inflation-linked bonds, and increased exposure to China. Within Treasuries, he said longer-dated maturities like the 30-year — which are less influenced by Fed policy — were more attractive. Bridgewater’s move into TIPs was previously reported by Bloomberg.

Bridgewater’s All Weather fund returns were up between 1% and 7% this year, he said.

Hakan Kaya, a senior portfolio manager at asset manager Neuberger Berman, which has more than $1 billion under management in risk parity strategies, also reported positive inflows. Kaya said he had made shifts such as rotating into assets like Treasury Inflation-Protected Securities.

AQR, which manages around $141 billion total, said with “all assets, including stocks, challenged by today’s low risk-free rate environment, we believe that the risk diversification of risk parity remains an excellent approach to portfolio construction.”

At least two major investors have decided to withdraw in recent months from risk parity, however, part of a trend which one pension fund consultant said was seeing large funds do their own diversification and seek higher yielding assets. The $34 billion Texas Permanent School Fund, for example, has mostly withdrawn, meeting records show.

CHALLENGES AHEAD

First introduced in the mid-1990s by Bridgewater https://www.bridgewater.com/research-and-insights/the-all-weather-story, risk parity grew in popularity after the 2007-2009 global financial crisis, investors said. Estimated assets under management are now about $120 billion, or roughly $400-$500 billion with leverage, according to Neuberger Berman https://www.nb.com/en/global/insights/risk-parity-and-the-fallacy-of-the-single-cause.

Investors and analysts said the strategy had benefited from bond yields trending ever lower. But with little space for bonds to rally, the strategy faces a problem, said Grant Wilson, head of Asia-Pacific at macro advisory firm Exante Data, in an Australian Financial Review column https://www.afr.com/markets/debt-markets/all-weather-risk-parity-strategy-loses-its-shine-20200913-p55v4b.

Michael Kushma, chief investment officer, global fixed income, at Morgan Stanley Investment Management, said if yields move upwards of 1%, higher returns become possible again. Benchmark 10-year yields are currently around 0.77%.

“I’m worried that the whole concept of risk parity will be much more complicated,” given the level of interest rates now, Kushma said.

Market turmoil in March hurt industry returns.

This year so far, risk parity strategies that target volatility of 12% had annual returns of negative 4% versus a 20.5% gain last year, according to HFR, a hedge fund industry data provider. In September, returns were down 1.3%.

Others counter the view that risk parity struggles in low yield environments. A paper https://www.panagora.com/wp-content/uploads/Investment-Insight_Risk-Parity-Utility.pdf by PanAgoro Asset Management said its research showed portfolios targeting low-yielding sovereign bonds held up well.

PENSION FUND MOVES

The Texas fund, which had around $2 billion https://tea.texas.gov/sites/default/files/Asset%20Mix%20SBOE%20063020.pdf allocated, decided to withdraw after saying in a report https://tea.texas.gov/sites/default/files/7-1-20%20CSF-PSFmin.pdf the strategy underperformed its benchmark. Holland Timmins, chief investment officer of the $34 billion fund, told a board committee on Sept. 1 http://www.adminmonitor.com/tx/tea/committee_on_school_finance/2020090122 that it had nearly exited risk parity.

The Pennsylvania Public School Employees’ Retirement System, which had $3.6 billion https://www.psers.pa.gov/About/Investment/Documents/performance/PSERS%20Total%20Fund%20Summary%20-%201Q20.pdf devoted to risk parity, said https://www.psers.pa.gov/About/Board/Resolutions/Documents/2020/2020-33.pdf this summer that its investment office had recommended reallocation to other assets.

Still, the Indiana Public Retirement System, with $4.3 billion allocated to risk parity, in Dec. 2019 started evaluating implementing a passive risk parity strategy to complement existing allocations.

Rhett Humphreys, partner at investment consulting firm NEPC, said he expects risk parity to return around 5%-5.25% over the next decade — not enough for many pension funds. 

Humphreys is working with some funds that are eliminating the strategy, which he said also suffered from being less exposed to outperforming U.S. equities than a 60/40 portfolio.

Bridgewater’s Prince, however, said the 60/40 portfolio was “probably disadvantaged much more” by a zero interest rate environment due to a lower return on bonds and more downside risk on equities. With risk parity, the portfolio can be restructured to keep diversification.

Humphreys added that while risk parity can make sense for smaller funds that may not have the capacity to diversify, larger funds can buy different assets directly.

Peter Willett, senior investment manager researcher at Mercer said while he expects investors to reassess their risk parity allocations, “they may not necessarily exit the space.”

“The fundamental principle of risk balance still holds,” Willett said.

(Reporting by Megan Davies and Maiya Kiedan, Editing by Paritosh Bansal and Catherine Evans)

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Railways outline investment to meet winter climate challenges – moosejawtoday.com

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Canada’s two major railways — CN and CP Rail — will invest $4.5 billion this year to meet the challenges of moving goods in harsh winter climates.

CP, which operates most of the southern routes on the Prairies, plans $1.6 billion on safety, network flexibility, increased capacity and communications according to the company’s 2020-21 winter plan.

Highlights of the winter plan include:

  • Air brake flow monitoring to maintain pressure
  • Technology to automatically detect cold wheels
  • Predictive powers to forecast rilling stock failures
  • High-speed camera inspection systems
  • In-house testing of new air brake valve gasket materials
  • Modernizing 201 locomotives and training over 400 employees
  • Expanding temperature forecasts system

CN will invest $2.9 billion on the winter plan with a focus on double tracking parts of the mainline, extending sidings, increasing yard tracks and building more infrastructure in both Port of Vancouver and Port of Prince Rupert areas. 

CN will acquire 1,500 new grain hopper railcars for the 2020–2021 crop year. 

Adding 260 new locomotives, for over 2,200 winter-prepped locomotives, should reduce loss of traction from ice, snow and water, resulting in wheel slippage. The new locomotives are 100 per cent alternating current, improving traction.       

Forty-one more air distribution cars will assist in a consistent flow of air through brake lines, allowing longer trains.

Sidings will be added and lengthened to allow trains to meet and pass for 140 miles of double track on mainlines, mostly in Western Canada.

Yard capacity will be increased at Winnipeg, Melville and Edmonton.

Ron Walter can be reached at ronjoy@sasktel.net

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Buying Bitcoin ‘Like Investing In Google Early Or Steve Jobs And Apple,’ Predicts Wall Street Legend And Billionaire Paul Tudor Jones – Forbes

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Bitcoin has come a long way in the ten years since it was created but, for some, it still feels early.

The bitcoin price, climbing to year-to-date highs this week and recapturing some of the late 2017 bullishness that pushed it to around $20,000 per bitcoin, has found fresh support from Wall Street and traditional investors this year.

Now, Wall Street legend and billionaire Paul Tudor Jones, who made headlines when he revealed he was buying bitcoin to hedge against inflation earlier this year, has said buying bitcoin is “like investing with Steve Jobs and Apple

AAPL
or investing in Google early.”

“Bitcoin has a lot of characteristics of being an early investor in a tech company,” Jones, who’s known for his macro trades and particularly his bets on interest rates and currencies, told CNBC’s Squawk Box in an interview this week, adding he likes bitcoin “even more” than he did when his initial bitcoin investment was announced in May this year.

“I think we are in the first inning of bitcoin,” he said. “It’s got a long way to go.”

Back in May, Jones revealed he was betting on bitcoin as a hedge against the inflation he sees coming as a result of unprecedented central bank money printing and stimulus measures undertaken in the wake of the coronavirus pandemic.

Jones compared bitcoin to gold during the 1970s and said his BVI Global Fund, with assets worth $22 billion under management, could invest as much as “a low single-digit percentage exposure percentage” in bitcoin futures.

“I’ve got a small single-digit investment in bitcoin,” Jones said this week. “That’s it. I am not a bitcoin flag bearer.”

However, Jones said he sees great potential in bitcoin and people who are “dedicated to seeing bitcoin succeed in it becoming a commonplace store of value, and transactional to boot, at a very basic level.”

“Bitcoin has this enormous contingence of really, really smart and sophisticated people who believe in it,” he said. “I came to the conclusion that bitcoin was going to be the best of inflation trades, the defensive trades, that you would take.”

Jones’ latest comments come as payments giant PayPal

PYPL
has this week announced it will allow its 346 million users to buy and spend bitcoin and a handful of other major cryptocurrencies.

The development has been taken as vindication for long-time bitcoin believers—many of whom see PayPal as an enemy of bitcoin.

Alongside PayPal’s support of bitcoin and cryptocurrencies, a number of publicly-listed companies have added bitcoin to their treasuries in recent months, with U.K.-listed bitcoin-buying app Mode becoming the first publicly-traded British company to put bitcoin on its books—making the announcement hot on the heels of Jack Dorsey-led payments company Square

SQ
.

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Did You Participate In Any Of Caribbean Investment Holdings' (LON:CIHL) Incredible 853% Return? – Yahoo Finance

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InvestorPlace

6 Tech Stocks Every Investor Should Watch

Hardware is becoming software, so investors are dumping hardware. At the same time, software is moving to the world of the cloud. These trends undeniably shape what tech stocks you should be buying.
Most computer chip companies today are “fab-less,” based not on manufacturing, but designs written in software. That is why Nvidia (NASDAQ:NVDA) today is worth more than Intel (NASDAQ:INTC).
At the same time, open-source software is replacing proprietary software, especially in the clouds, where the money is made. That is why Facebook (NASDAQ:FB) is worth more than Oracle (NYSE:ORCL).InvestorPlace – Stock Market News, Stock Advice & Trading Tips
What does this mean for companies in the business of making computer hardware? It means they need to find new paths to profit. And that also means software names are the best tech stocks to buy.
The biggest hardware makers are aware of this. The hope investors have for them is they can execute and return to prominence. Until they do, however, their growth and valuations will lag the market.

7 Airline Stocks to Buy on Pelosi Stimulus Hopes

For now, keep an eye on these six tech stocks as they pivot to the software world:
International Business Machines (NYSE:IBM)
Dell Technologies (NYSE:DELL)
Cisco Systems (NASDAQ:CSCO)
Nokia (NYSE:NOK)
Ericsson (NASDAQ:ERIC)
Workhorse (NASDAQ:WKHS)

Tech Stocks: International Business Machines (IBM)
Source: JHVEPhoto / Shutterstock.com

Former IBM CEO Virginia Rometty missed the cloud. Under her watch, IBM went from being the world’s unquestioned technology leader to a laggard. Facebook is now worth over six times more.
IBM has recognized its mistake. Rometty gave up the CEO chair in April to Arvind Krishna, who was running its cloud operations. He named Jim Whitehurst from Red Hat, the leading open source company in the world, as president.
Since Krishna took over, however IBM stock has barely budged. Despite the cloud experience of its new leaders, IBM remains a hardware company. Its primary profit center remains its Z Series mainframes, and the proprietary software that runs on them. After delivering new versions in the second quarter, systems sales jumped 69%, year over year, to $1.9 billion, and profits rose 4.3%.
But that profit center has been milked dry. Getting rid of older workers just drained its talent pool, and put the government’s eyes on it.
It will take tricky financial engineering for IBM to find the cash flow needed to compete. It could sell the hardware units to private equity, spin out Red Hat, or spin its cloud operations into a REIT, as companies like Equinix (NASDAQ:EQIX) have done.
For now, IBM says it’s focusing on “hybrid cloud.” Here, enterprises retain their own data centers built to cloud standards, then arbitrage larger public clouds like those of Amazon (NASDAQ:AMZN), Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) and Microsoft (NASDAQ:MSFT). It’s also pushing its quantum computing efforts, although they won’t contribute to profit for years.

Dell Technologies (DELL)
Source: Jonathan Weiss / Shutterstock.com

Dell Technologies is even bigger than International Business Machines and even more undervalued.
The story starts in 2016, when Dell bought EMC, which controlled VMware (NYSE:VMW), for $67 billion. Four years later, $45 billion of the debt remains on Dell’s books. That means the “enterprise value” of Dell, including its debt, is $95 billion. The same calculation, applied to IBM, leads to an enterprise value of $165 billion, on revenue of $77 billion.
VMware and IBM’s Red Hat are valuable because they offer virtualization and other cloud infrastructure software. It’s the kind of franchise the market often values at 10 times revenue. VMware had sales of about $11 billion for its fiscal 2020.
Here is the problem. Because of the funky corporate structure, it is hard to value Dell. What is it really worth without its massive stake in VMware?
The answer is to break Dell up again. Analysts think both companies would be worth more separate. Dell had fiscal 2020 net income of $4.6 billion. VMware could be worth $15-$20 per share more, nearly $10 billion. VMware CEO Pat Gelsinger says VMware could tie up with more hardware vendors if it were independent.
Selling VMware would also bring Dell enough cash to retire its debt and compete more closely against Hewlett Packard Enterprise (NYSE:HPE). HPE is currently killing it  in “hyperconverged” hardware, a key data center market, and now matches it in server market share.
A spinoff is planned, with Dell and hedge fund partner Silver Lake maintaining a majority stake. The big issue? The move will not raise cash to pay down debt. Moreover, the split wouldn’t happen until September 2021.
Even so, analysts call this a big win that will unlock Dell’s value in hardware, where many of its products are considered leaders. Take it all together, and a patient investor should do well buying Dell here. But you’re buying financial engineering, not the real kind.

Tech Stocks: Cisco (CSCO)
Source: Sundry Photography / Shutterstock.com

Cisco Systems has been adrift ever since Chuck Robbins became CEO in 2015
Robbins’ strategy has been to shift Cisco’s revenue from expensive networking gear to software subscriptions. It’s not working. The revenue today is the same as it was in 2016. Profits have been uneven. Still, the stock’s low price has analysts pounding the table for it, calling it cheap and undervalued.
But that’s not how tech stocks work. When a company stops growing, it starts dying. A small cut tells the sharks to feed.
Cisco has made a half-dozen security acquisitions since Robbins took over, and 11 acquisitions since the start of 2019. But it’s not solving the problem. The number of bugs hitting Cisco software is increasing. Some impact key products like its high-end switches.
BabbleLabs is one of these recent deals, bought to improve its videoconferencing experience. But that only serves to underline Cisco’s weakness. Cisco practically invented videoconferencing. But when the pandemic hit, Zoom Video (NASDAQ:ZM) became a verb. Cisco is now worth only 15% more than Zoom, which came public in April 2019 and covers just one of Cisco’s product niches.
Competitors can smell blood in the water. Hewlett Packard Enterprise finished its acquisition of Silver Peak, a software-defined networking company that will be part of its Aruba unit. The move accelerates the shift of networking from a product to a service. It increases the pressure on Cisco.

Nokia (NOK)
Source: RistoH / Shutterstock.com

The move of hardware to software, and of software becoming open source, has also hit the telecom equipment market hard.
Nokia lost its niche in cell phones, bought into the equipment market, and is now seeing its lead there threatened.
Part of the threat comes from China’s Huawei, which can make equipment for less and has been making inroads into the carrier market as a result. Nokia’s response is to support OpenRAN, a common set of interfaces for Radio Access Networks.
Nokia has been using OpenRAN support mainly to compete with Huawei and its Scandinavian rival, Ericsson. It says a complete set of OpenRAN interfaces will be available next year.
The hope now is that small, OpenRAN companies can be bought out, or parts of the emerging standards held back. That would let Nokia limit competition while still claiming openness. A short price war, initiated by the larger vendors, could quickly finish off the OpenRAN folks, analysts believe.
But there’s another threat.
Microsoft has already bought Affirmed Networks and Metaswitch, making its bid for an OpenRAN company look likely. Facebook is backing the Telecom Infra Project, the consortium that created OpenRAN. Open source, in other words, is coming.
Will Nokia be able to main relevance among tech stocks?

Tech Stocks: Ericsson (ERIC)
Source: rafapress / Shutterstock.com

While Nokia has been beating a drum for OpenRAN, rival Ericsson has been dismissing the threat.
Ericsson is copying the strategy of Qualcomm (NASDAQ:QCOM), which has patents, copyrights and trademarks for all modem buyers to take its licenses. Importantly, these licenses come at a cost that makes rivals uncompetitive. But Qualcomm fought a bitter five-year legal war on three continents to achieve its dominance. Ericsson lacks that time, and it lacks that money.
Ericsson insists that OpenRAN has security issues. It has already made its own equipment fully compliant with existing security and encryption standards. It has introduced an integrated packet core firewall to boost security further. This also increases its proprietary advantage.
What might settle the dispute between open source and proprietary would be for Ericsson to buy Nokia.
Rumors of such a deal were floated in February. President Donald Trump has been pushing for more control over the 5G equipment market, even suggesting Cisco Systems should buy one of the two Scandinavian companies.
All this is leading to a new technology, Cloud RAN. This idea should dominate the new market for managed services, which is growing rapidly. What is this? The idea is to run radio networks according to what are called “cloud principles.” Ericsson is already pushing its own proprietary framework for this “journey.”

Workhorse (WKHS)
Source: rblfmr / Shutterstock.com

Tesla (NASDAQ:TSLA) became the most valuable car company in the world by proving that cars represent technology, not manufacturing.
This has spurred interest in other electric car companies like Workhorse.
Since late June, WKHS stock has skyrocketed. Why? The reason is a U.S. Postal Service contract, which Workhorse has yet to win, for 140,000 electric mail trucks. Workhorse is one of three finalists. Its C1000 design features a light body with 1,000 cubic feet of storage, and a short range that recharges overnight.
There is more than hype involved here. Workhorse’s first vans have traveled 8.5 million miles. It’s been in this niche for a decade. The trouble is its batteries are not yet competitive with gasoline engines. At the present price of $300 per kilowatt hour, a battery-powered van costs $30,000 to make.
If Workhorse wins the postal contract, and if other last-mile companies follow suit, WKHS stock will be a big winner.
But that’s a lot of ifs. This makes Workhorse less an investment than a speculation. Don’t bet any money on this stock you can’t afford to lose.
There’s reason to speculate. It’s probable that, over the next decade, electric vehicles will take over the market. It’s likely that, in last-mile delivery, with a limited number of players, this can happen quickly. Contracts offered at scale are always valuable, and often profitable.
But there is a lot of wishful thinking going on here. If the niche Workhorse is focused on proves out, why won’t Tesla just take it?
At the time of publication, Dana Blankenhorn held long positions in AMZN, NVDA and MSFT.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. 
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