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The quest for the investment holy grail — an index of everything – Financial Post

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One man has been on a quest to create the ultimate index for more than a decade. Now he thinks he’s getting close

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Financial benchmarking giant MSCI is working on an “ultimate index” tracking the performance of all markets, which could mark the culmination of half a century of academic theory and practical financial engineering.

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Indexing is a booming business, slicing markets up into geographies or categories such as equities or bonds, and then subdividing further by size or industry. These are then used as benchmarks for fund managers, or packaged up into investable products. But a way to combine everything from commodities to venture capital in one gauge has proven elusive.

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“It’s the holy grail,” says Mark Makepeace, the head of index provider Wilshire. “It solves a core problem of investing and would be hugely beneficial.”

When Makepeace led FTSE Russell, the group teamed up with Nobel laureate and Stanford economics professor William Sharpe to create an adaptive asset-allocation tool that started to tackle the idea of an ultimate index, but included only stocks and bonds.

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A true ultimate index would go further, including other big asset classes, like commodities, and even private assets that do not trade on an exchange, like real estate, infrastructure, bank loans and stakes in hot Silicon Valley companies.

Peter Shepard, head of analytics research and product development at MSCI — one of the indexing industry’s Big Three, alongside FTSE Russell and S&P Dow Jones Indices — has been working on the quest to produce an index of this kind for more than a decade. He thinks he is getting close, although he is reluctant to term the final result an “ultimate index.”

Before he joined MSCI in 2007, Shepard was a theoretical physicist at Berkeley — his PhD thesis was titled On non-perturbative quantum gravity: Holography and matrix models in string theory — and he spent much of his time chasing the holy grail of physicists, a unifying Theory of Everything. He is therefore wary of applying the same label to the realm of indexing.

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“I need to be careful about not falling into that trap again,” he said. “I think we may be able to find a grand unified theory of physics at some point, but we’re not going to be able to find a grand unified theory of markets.”

The standard investment industry benchmark has long been the 60/40 portfolio — 60 per cent stocks and 40 per cent bonds. Vanguard’s US 60/40 fund has returned 168 per cent over the past two decades. Yet what to include in a broader index is hotly debated, and how to construct it is fraught with practical complications in sourcing reliable up-to-date data in areas like private markets.

Despite that, Shepard is convinced they must be included. Private equity has returned about 12 per cent a year on average over the past 15 years, and private debt about 8 per cent, according to Morgan Stanley. “If you leave private assets out of this Platonic ideal, you’ll be leaving a whole lot of performance behind,” Shepard said.

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Even if one can come up with a decent mix of asset classes, figuring out how to sort by geography and other factors is not straightforward.

Of the many ways that a chief investment officer adds value, some can be standardized

Peter Shepard

What is the best mix of U.S., European, Chinese or Brazilian stocks? How much exposure should there be to larger stocks or smaller ones? Should the bond allocation be weighted by the volume of debt issuance — as is standard for fixed income benchmarks — or is there a smarter way? The optimal answers are still uncertain, Shepard admits, but “simplicity and transparency are key.”

“I could come up with a great black box, but if you don’t understand it, you won’t trust it and you won’t use it,” he said. “My hypothesis is that of the many ways that a chief investment officer adds value, some can be standardized.”

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The prospect is not just an object of geeky fascination in the indexing industry. If well constructed it could form the basis of cheap but powerful investment products for everyone from retirees to sovereign wealth funds, by simplifying the often arduous and expensive task of splitting money between different markets.

While the cost of investing in individual asset classes has been hammered down thanks to the invention of index funds, deciding on how to mix them is often handed over to a pricey financial adviser, or in the case of a pension plan, to a team of expensive professionals.

If one could assemble one broad investable benchmark for all assets — a true reflection of what Sharpe termed “the market portfolio” back in the 1960s, rather than a messy or facile proxy — then one could perhaps create a single, simple financial product suitable for most investors.

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“I think there’s a huge opportunity here,” Shepard said. “The asset allocation decision is the most important decision for a lot of investors . . . But we’re leaving this really critical decision to people who may not be that skilled, like my parents, or they turn it over to someone who charges fees for it.”

Despite the considerable hurdles, Shepard is optimistic that the quest for the Ultimate Index will soon bear fruit. However, he thinks that in practice the final result will be different flavours of a broad multi-asset benchmark.

“It might be a grand unified theory in terms of the framework. But customization will be essential, as one size will not fit all investors,” he says. “At the same time, it has to be simple.”

© 2021 The Financial Times Ltd

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U.S. securities regulator probes investment advisers over crypto custody

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By Chris Prentice

NEW YORK (Reuters) – The U.S. Securities and Exchange Commission is probing registered investment advisers over whether they are meeting rules around custody of client crypto assets, three sources with knowledge of the inquiry told Reuters.

The SEC has been questioning advisers’ efforts to follow the agency’s rules around custody of clients’ digital assets for several months, but the probe has gathered pace in the wake of the blow-up of crypto exchange FTX, the sources said. They spoke on condition of anonymity as the inquiries are not public.

Advisers managing clients’ digital assets typically use a third party to store them.

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SEC enforcement staff are asking investment advisers for details around what the firms did to assess custody for platforms including FTX, one of the sources said. The broad enforcement sweep, which has not been previously reported, is a sign the top U.S. markets regulator’s scrutiny of the crypto industry is expanding to more traditional Wall Street firms.

A spokesperson for the SEC declined to comment.

By law, investment advisers cannot have custody of client funds or securities if they do not meet certain requirements to protect the assets. One of these demands that advisers hold such assets with a firm deemed to be a “qualified custodian,” though the SEC does not hold any specific list or offer licenses to firms to become such custodians.

The SEC’s investigation signals the regulator is targeting a long-brewing issue for traditional firms that have sought ways to invest in crypto, attorneys told Reuters. The agency’s accounting guidance has made it too capital-intensive for many lenders to hold digital assets on behalf of clients, limiting options for advisers seeking custodians.

“This is an obvious compliance issue for investment advisers. If you have custody of client assets that are securities, then you need to custody those with one of these qualified custodians,” said Anthony Tu-Sekine, head of Seward and Kissel’s Blockchain and Cryptocurrency Group.

“I think it’s an easy call for the SEC to make.”

Under Democratic leadership, the SEC has made crypto a priority area for enforcement, nearly doubling the size of its crypto team last year. But the regulator is under fresh pressure to go after crypto in the wake of a series of bankruptcies across the industry and the unveiling of U.S. charges against FTX’s founder and former head, Sam Bankman-Fried, for allegedly committing fraud. He has pleaded not guilty.

Two of Bankman-Fried’s associates, former Alameda chief executive Caroline Ellison and former FTX chief technology officer Gary Wang, have both pleaded guilty to defrauding investors and agreed to cooperate.

The SEC has also been probing FTX equity investors for details of their due diligence efforts when they invested in the crypto exchange.

(Reporting by Chris Prentice in New York; Additional reporting by Elizabeth Howcroft in London and Hannah Lang in Washington; Editing by Megan Davies and Leslie Adler)

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Nestle unveils $100 million Colombia investment to grow capacity

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BOGOTA (Reuters) -Global food giant Nestle is set to invest $100 million over the next three years in its Colombian operations, President Gustavo Petro said on Friday, part of his push to boost industrialization.

The Colombian leader outlined the announcement in a post on Twitter late Friday.

The new investment plan builds on $13 million already spent by the world’s largest food and beverage producer in the South American country, the government said in a statement, with the new funds to be focused on increasing production capacity and updating technology.

“Industrializing Colombia is essential if we want to get out of poverty,” Petro wrote on Twitter.

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Nestle did not immediately respond to a request for comment.

But the statement quoted its top executive for Latin America, Laurent Freixe, as saying that the plan will allow the company to strengthen its product portfolio as well as align with some of the government’s priorities, such as promoting youth employment.

(Reporting by Luis Jaime Acosta and Carolina Pulice; Editing by David Alire Garcia and Sandra Maler)

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Award-winning funds: Manulife Investment Management among top honourees from Fundata Canada

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C$ unless otherwise stated                                                                                                                                                        TSX/NYSE/PSE: MFC     SEHK: 945

Combined wins of 15 segregated funds,10 mutual funds and 2 ETFs earn Manulife Investment Management honours for 11 consecutive years

TORONTO, Jan. 27, 2023 /CNW/ – Manulife Investment Management was recognized by Fundata Canada for its performance in 15 segregated funds,10 mutual funds and 2 ETFs throughout the calendar year. With 27 funds earning FundGrade A+® Awards, Manulife Investment Management has been recognized with awards for 11 consecutive years, every year since the awards’ debut in 2012.

The FundGrade A+® Award is given annually to investment funds and managers who show consistent, outstanding, risk-adjusted performance through the year, based on up to 10 years of history. Achieving a FundGrade A+® Rating is an honour because only around 6% of the investment fund products available in Canada have received a FundGrade A+® rating.

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“I would like to thank and congratulate the portfolio management teams and our colleagues who have enabled us to be recognized today,” said Patricia Corcoran, Head of National Sales, Manulife Investment Management, Canada. “Given the volatility and challenging economic conditions of the past year, I’m particularly proud of our team’s achievements in receiving these FundGrade A+® ratings. We are committed to providing Canadians with diverse investment solutions that meet investor needs, and this recognition demonstrates our success.”

The following segregated funds, mutual funds, and ETFs were awarded Fundata’s FundGrade A+® rating:

* Segregated fund performance shown for GIF Select InvestmentPlus, MPIP Segregated Pools and Manulife RetirementPlus funds are for the front-end sales charge. For Ideal funds, the performance shown is for the no-load sales charge. Performance for the winning segregated funds is for the period ending December 31, 2022. The Manulife RetirementPlus and Manulife Ideal segregated fund contracts are no longer open to new deposits effective October 2022.

**The Fundgrade A+® award applies to an entire fund family, including every segregated fund product and series where a fund is available. This fund has been listed twice to highlight that it is available in both GIF Select and MPIP Segregated Pools contracts.

***Mutual fund performance shown is for advisor series.  Performance for the winning mutual funds is for the period ending December 31, 2022.

**** Performance for the winning ETFs is for the period ending December 31, 2022.

FundGrade A+® is used with permission from Fundata Canada Inc., all rights reserved. The annual FundGrade A+® Awards are presented by Fundata Canada Inc. to recognize the “best of the best” among Canadian investment funds. The FundGrade A+® calculation is supplemental to the monthly FundGrade ratings and is calculated at the end of each calendar year. The FundGrade rating system evaluates funds based on their risk-adjusted performance, measured by Sharpe Ratio, Sortino Ratio, and Information Ratio. The score for each ratio is calculated individually, covering all time periods from 2 to 10 years. The scores are then weighted equally in calculating a monthly FundGrade. The top 10% of funds earn an A Grade; the next 20% of funds earn a B Grade; the next 40% of funds earn a C Grade; the next 20% of funds receive a D Grade; and the lowest 10% of funds receive an E Grade. To be eligible, a fund must have received a FundGrade rating every month in the previous year. The FundGrade A+® uses a GPA-style calculation, where each monthly FundGrade from “A” to “E” receives a score from 4 to 0, respectively. A fund’s average score for the year determines its GPA. Any fund with a GPA of 3.5 or greater is awarded a FundGrade A+® Award. For more information, see www.FundGradeAwards.com. Although Fundata makes every effort to ensure the accuracy and reliability of the data contained herein, the accuracy is not guaranteed by Fundata.

Manulife Investment Management is a trade name of Manulife Investment Management Limited (formerly named Manulife Asset Management Limited) and The Manufacturers Life Insurance Company.  The Manufacturers Life Insurance Company (Manulife) is the issuer of Manulife Investment Management insurance contracts and the guarantor of any guarantee provisions therein. Manulife Mutual Funds are managed by Manulife Investment Management Limited.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund, ETFs and segregated fund investments. Please read the fund facts as well as the prospectus before investing in mutual funds, the ETF Facts as well as the prospectus before investing in ETFs and information folder, contract and fund facts before investing in segregated fund contracts. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. Mutual funds and ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. Any amount that is allocated to a segregated fund is invested at the risk of the contract holder and may increase or decrease in value. Manulife, Manulife Investment Management, the Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

About Manulife Investment Management

Manulife Investment Management is the global brand for the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship and the full resources of our parent company to serve individuals, institutions, and retirement plan members worldwide. Headquartered in Toronto, our leading capabilities in public and private markets are strengthened by an investment footprint that spans 19 geographies. We complement these capabilities by providing access to a network of unaffiliated asset managers from around the world. We’re committed to investing responsibly across our businesses. We develop innovative global frameworks for sustainable investing, collaboratively engage with companies in our securities portfolios, and maintain a high standard of stewardship where we own and operate assets, and we believe in supporting financial well-being through our workplace retirement plans. Today, plan sponsors around the world rely on our retirement plan administration and investment expertise to help their employees plan for, save for, and live a better retirement. Not all offerings are available in all jurisdictions. For additional information, please visit manulifeim.com.

About Manulife

Manulife Financial Corporation is a leading international financial services provider, helping people make their decisions easier and lives better. With our global headquarters in Toronto, Canada, we provide financial advice and insurance, operating as Manulife across Canada, Asia, and Europe, and primarily as John Hancock in the United States. Through Manulife Investment Management, the global brand for our Global Wealth and Asset Management segment, we serve individuals, institutions, and retirement plan members worldwide. At the end of 2021, we had more than 38,000 employees, over 119,000 agents, and thousands of distribution partners, serving over 33 million customers.

We trade as ‘MFC’ on the Toronto, New York, and the Philippine stock exchanges and under ‘945’ in Hong Kong. Not all offerings are available in all jurisdictions. For additional information, please visit manulife.com

SOURCE Manulife Investment Management

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