201 3F E GI NV ESTM ENTF ORU M

March1920,2013
PresentationSummary:KeyTakeaways

EquilibriumMarkets

KennethFrench

ProfessorofFinance/
TuckSchoolofBusiness/
DartmouthCollege

Activeinvestingisanegativesumgame.
Theaverageactivelymanagedportfoliowillunderperformapassivestrategyduetohigherfees/costs.
Identifyingsuperiorstrategiesormanagersbeforehandisdifficult.Further,themostskillfulmanagers
limitaccesstotheirscarcecapitalandtheirabilities.
Todeterminestatisticallywhetheramanagerwasskillful(asopposedtolucky)wouldrequiredecades
ofperformanceforthevastmajorityofmanagers.
Activemanagementflourishesduetoconfusion,overconfidence,andsuperiorskill,whichinvestors
seek.(Frenchsresearchindicatesonly2to3%ofmanagersmaybeskillful.)
Investorsshouldbehaveasifthemarketsareefficient.

CurrencyWars

JamesRickards

Partner/
JACCapitalAdvisors

Theabsenceofgrowthindevelopedcountriesaroundtheworldhassparkedanewcurrencywar,one
thatisseekingtocreateinflationtoincreasenominalGDPtomeetgrowingdebtburdens.
Currencywarshappenedtwiceinthelastcentury,resultinginhighinflationandeconomicweakness.
TheFedhasforcedexponentialgrowthinthemoneysupply,butthegrowthhaslimitedeffectwithout
spending(velocity);however,theFedmisapprehendsthepropertiesofriskincurrencyandcapital
marketsandtheirownabilitytoselfcorrect.
Fedeffectivenessislimitedascapitalmarketsareacomplexsystem(adaptiveandhighlyconnected).
Whenthecurrentformofinternationalmonetarysystemcollapsesduetocurrencywars,therewillbe
threepotentialoutcomes:multiplereservecurrencies(createmoreproblemsthantheysolve),aglobal
reservecurrency(IMFprintingpress),oranewgoldstandard(requiringcoordinationwithmany
countries)orchaos.

The3Ps:PrivateEquity,Politics,andPhilanthropy
UnlikelytoseeagrandbargaininWashingtonduetodividedgovernmentandlackofwill.
Thegovernmentcouldseekrevenuebyeliminatingthedeductionfromstateandlocalincometaxes,
municipalbonds,charitabledeductions,ormortgageinterest.Morelikelytocapthesedeductions.
TheU.S.isinrelativelygoodshapecomparedtootherdevelopedeconomies,duetoarebounding
housingmarket,insourcedmanufacturing,andtheU.S.energyrevolution.

TheU.S.stilldominatestheprivateequityindustry;however,theU.S.globalshareofGDPhasshrunk
DavidRubenstein
CoChiefExecutiveOfficer/ from50%to20%.Thefuturetrendofprivateequitythereforehastobecomemoreglobal.
Rubensteinhaspledgedtodonatemostofhiswealthtophilanthropiccausesandhasmadeeffortsto
TheCarlyleGroup
preserveimportantpiecesofU.S.history.

TheTop10Surprisesof2013

For200+yearsthroughseveralmajorwars,thenationaldebtincreasedto$6trillion;inthelastdecade,
ithasgrowntoover$16trillion.Thisisanunsustainableaccumulationdespitethefactthatweare
benefitingfromlowinterestrates.
Politiciansarereactionary,andwewillneedacrisistoforceofficialstomaketoughdecisions.
Thesolutiontothedebtproblemistogeneratemorerevenuebybroadeningthetaxbaseand

completelyrewritingthetaxcode.
ByronWien

Realestateandhighyieldstructured,distressed,andleveragedloansareattractivestrategies.
ViceChairman/Blackstone
AdvisoryPartnersLP

EvolutionofCreditStrategies

JoshFriedman

FoundingPartner,Co
Chairman,CoCEO/
CanyonPartners,LLC

Themacroenvironmenthasbeenshapingtheopportunityset;dealflowhasincreasedwithaggressive
underwritingpromotingrisktaking,butFriedmanremainscautious.
Thenextassetbubblewillbeingovernmentorsovereigndebt,asinterestratesareat500yearlows.
Structuredalphaisbecomingimportantinthecreditspace,withhedgefundshavingmoreflexibilityto
exploitidiosyncraticareasofthemarkets.
Aircraftandrestaurantsecuritizations,investmentgradespecialinvestmentvehicles,collateralizedloan
obligations,andnonagencyresidentialmortgagedbackedsecurities(RMBS)areattractivevs.traditional
highyieldcorporatebondinvestments.Opportunitiesalsoexistinbankruptcies.

BalancingRiskandReturninaLowReturnEnvironment
Anthropologicaltrends,orglobalmegatrends,areimportantwhenshapinganinvestmentthesisfor
thelongtermfuture.Currenttrends:individualempowerment,diffusionofpower(U.S.losingitsstatus
asthesoleglobalsuperpower),demographicpatterns(agingpopulations),andincreaseddemandfor
resources.
Therateofrealpercapitaeconomicgrowthinthedevelopedworldisslowing.

MichaelOyster,CFA Innovationsthatwereadoptedinthedevelopedworldoveracenturyago,suchasrunningwater,
electricity,andtheinternalcombustionengine,providedmonumentalshiftsinsocietysabilitytogrow
ManagingPrincipaland
economically.
PortfolioStrategist/
FundEvaluationGroup,LLC Asthemiddleclassgrowsandtheinnovationslongenjoyedinthedevelopedworldspreadinthe
emergingandfrontiermarkets,productivitywillincrease,servingasacatalystforgrowth.

Investorsshouldflattentheirportfoliostoreducefinancialassets(stocksandbonds)infavorofreal
assetsanddiversifyingstrategiestoreduceriskandtobenefitfromglobalmegatrends.

HealthcareandHealthcareInvestinginthe21stCentury

JoonYun,MD,CFA
President/
PaloAltoInvestors

Thinkbigandinvestinunconventionalideasthatnoonewantsinnovativedrugshavethepotentialto
changetheentireprescriptionmedicationlandscape.
Pensionfundscouldinvestinhealthcareasanaturalhedgeagainstrisinghealthcarecostsand
increasinglifeexpectancy.
Agingisaprogrammedtraitinhumansandhumancells,butperhapsadifferentapproachtotreating
patientscanhelp;forexample,cancercelltypesmightbeleveragedtochangecellaging.
Healthcareisoftenthoughtofasaproblemintodayseconomy,buthealthcareaddsvalueandshould
beseenasthesolution.
Viewhispresentationonyoutube.com/drjoonyun.

EmergingMarkets:AnEngineforGlobalGrowth,butNotWithoutRisk
Investmentopportunitiesinemergingmarketsspanassetclasses(publicequity,privateequity,anddebt).
InvestorsshouldlookbeyondtheBRICs(Brazil,Russia,India,canChina)andotheremergingmarkets,asfrontiermarketsareona
similarpathofdevelopmenttothatofemergingmarkets20yearsago;thesemarketsalsoofferexposuretomarketsthatare
uncorrelatedtoemergingmarkets.
Emergingandfrontiermarketsareespeciallysensitivetomacrorisks;therefore,investorsshouldmonitorpolitical,social,and
economicissuesandtheirimpactoninvestmentsintheregion.

InvestinginNicheCreditStrategiesinaLowReturnWorld
TheU.S.housingrecoveryisanticipatedtocontinueatamoderatepaceandnonagencyresidentialmortgagebackedsecurities
(RMBS)remainattractive.
Middlemarketcapitalsolutionsremainattractiveduetothelackoflendinginthesemarketsfrombanks.
Successfulinvestingintradeclaimsrequiresastrongsourcingcapabilityandahealthyamountofbankruptcies.

TheU.S.EnergyRevolution:OpportunitiesandChallengesforInvestors
TheU.S.isexperiencingunprecedentedgrowthinitsdomesticenergysupply,dueinlargeparttonewdrillingtechnologiesthat
havemadepreviouslyinaccessibleoilandgasreserveseconomicallyviable.
NewproductionofoilandgasintheU.S.iscreatingdemandforinfrastructure,andpubliclytradedMasterLimitedPartnerships
areuniquelypositionedtobenefitfromthistrend.
Privateequityenergyfundsprovidegrowthcapitaltomanagementteamsseekingtoacquireanddevelopoilandgasassetsinthe
U.S.Theyrepresentastablesourceofequitycapital,allowingmanagementteamstopursueacquisitionswhenthecapitalmarkets
maybeclosedandcompellinginvestmentopportunitiesareavailable,suchasinearly2009.

BuildingDiversifyingStrategies:ARiskBasedApproach
Diversifyingstrategiesarenotanassetclass,butratheruniqueordynamicstrategiesthatshouldhavelowcorrelationstofinancial
assets.
Mostinvestorslargestportfolioriskisequityrisk.Idealdiversifyingstrategiesallocationshouldhaveacorrelationof<0.60tothe
MSCIWorldIndex,andabetaof<0.30.
Thepanelistsdiscussedhowtheybuiltandmaintaineddiversifyingstrategiesportfoliosattheirrespectiveinstitutions.

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