Raised Expectations, Lowered Rates of Return

By

Is Technology Making You Too Bullish on Stocks?

The CFA Institute European Investment Conference is a focused, interactive conference for Europe’s leading investment professionals. The 2017 CFA Institute European Investment Conference will bring portfolio managers, analysts, chief investment officers, and CEOs together in Berlin on 16–17 November.

In the aftermath of the Global Financial Crisis, central banks have pursued near-zero interest rate policies, followed by zero interest rate policies, arriving at negative interest rate policies in some countries. As rates continue their descent, their distortionary effect on expected returns has grown more pronounced, presenting investment managers with a difficult set of decisions.

A column in the Wall Street Journal noted that central banks’ interest rate policies have made everything more expensive than it looks. The column quotes Antti Ilmanen, a principal at AQR Capital Management, who says that “everything is expensive because this thing at the heart of the system has gone to all-time lows.” Lower interest rates make it difficult to determine the intrinsic value of an investment, which increases the risk that investment managers will pay too much for their investment returns.

Fortunately, Ilmanen has spent a substantial amount of time considering how to avoid over-paying for investment returns.

Ilmanen is the author of Expected Returns: An Investor’s Guide to Harvesting Market Rewards, which considers historical average returns, financial theories about risk and behavior, and market conditions as inputs that can be considered to identify intelligent investment strategies. The Economist’s Buttonwood blog describes Ilmanen’s book as “insightful and wonderfully lucid,” exploring some of Ilmanen’s ideas and noting the similarities between increased lottery ticket sales and investors who over-pay for shares in fast-growing companies.

At the 2016 CFA Institute European Investment Conference, Ilmanen discussed the challenges of generating returns in a low interest rate world.

Keep up with information and updates about this event by subscribing to the European Investment Conference blog.


All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockphoto.com/vDraw

This entry was posted in Investment Topics, News, Portfolio Management, Quantitative Methods and tagged , , , . Bookmark the permalink.

Leave a Reply

Your email address will not be published.