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2017 Fund Flows: Passive Trumps Active (Even in International Equity)

2017 was the year of massive inflows into passive funds, according to Morningstar’s annual fund flow report, which covers mutual funds and ETFs. The report highlights that a total $692 billion flowed into passive funds, led by U.S. equity and international equity funds. Conversely, almost $7 billion flowed out of actively managed funds, which was far less than outflows in the previous two years. That’s a pretty significant trouncing by passive in the annual fund flow race.

Posted by RSQ Team on Feb 7, 2018 4:50:56 PM

Topics: International Equity

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Portfolio Factor Allocation in International Equity Markets

Many hedge funds failed to outperform last year --including some of the most well-known investors-- as individual stock selection became exceptionally difficult in a low volatility environment. This article cites that some investors who struggled last year were those with deep sector knowledge. And yet, some successful investors in 2017 were also sector specialists, albeit experts in different industries (technology and biotech, in this case). With the obvious benefit of hindsight, this suggests that the volatility of a portfolio's returns can be reduced if an investor allocates by sector allocation. But how does this compare to allocation through other factors, like market cap size, style (value vs. growth), and region? Let's look at the numbers.

Posted by Daeil Cha on Feb 1, 2018 11:16:16 AM

Topics: From the Desk of Daeil Cha, International Equity

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Oil: Don’t hold your breath on rig counts

In June 2017 we wrote about oil prices being likely too low; a lot has changed since then. With WTI now at over $60 per barrel (and Brent almost $70 per barrel), market participants are wondering how much higher we can go, or worse yet when prices will revert. One ‘signpost’ analysts quote very often is the (Baker Hughes) U.S. oil rig count, which is published on a weekly basis on Fridays. The logic is that if oil prices get too high, rig count will rise, production will grow, and prices will be depressed. Conversely, if rig counts stay flat or drift lower, oil prices will continue to grind higher.

Posted by Luis Ahn on Jan 24, 2018 6:15:36 PM

Topics: oil, From the Desk of Luis Ahn

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From the Desk of Richard Pell

2017 ANNUAL LETTER 

2017 Left Us Shaking Our Heads

R Squared Capital Management celebrated its four year anniversary in May, 2017. As many of you know, our process is based on an international equity strategy that we created back in 1995 while working together at Julius Baer Investment Management. The team at R Squared utilizes both fundamental and macroeconomic analysis in our quest to correctly identify structural tailwinds and headwinds. Over the course of 20+ years, this approach has served us and our investors well. 

Posted by Richard Pell on Jan 17, 2018 8:50:13 PM

Topics: From the Desk of Richard Pell, Annual Letter

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Net Neutrality Repeal: What it Means for Investors

In December 2017, the FCC voted to remove rules that regulated the companies that connect users to the internet. These Network Neutrality rules forced internet providers to treat all internet traffic equally. Whether video, email, instant message or website, a carrier would have to transport all bits (a bit is the smallest unit of information) the same.

Without regulation, it is possible for an Internet Services Provider (ISP - generally your cable or phone company) to block some services, degrade other services, or force services to pay for access. Imagine if your cable bill priced internet access to Facebook separate from access to Netflix. Imagine if the Fox News website wouldn’t load but the New York Times website did. Imagine if, to launch a new website, you had to negotiate a separate agreement with the ISP in each geography you wanted to serve. It isn’t likely that ISPs would do something so obvious or controversial, but they now have the power to do so.

Posted by Harry Polishook on Jan 10, 2018 10:49:37 AM

Topics: From the Desk of Harry Polishook

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2017 Blog Recap

Happy New Year!

We sincerely appreciate each of you for subscribing and reading our thoughts on the market. We hope this information has been useful.

Below, we have highlighted our top 3 most popular blog posts from 2017. Enjoy!

Regards,

- The R Squared Team

Posted by Richard Pell on Jan 2, 2018 4:21:34 PM

Topics: From the Desk of Richard Pell

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Mercedes to Tesla: Can I Borrow Your Electric Car?

Earlier this year the international equity team at R Squared Capital Management wrote a blog about the potential winners and losers in the electric car race. There’s been some recent news that adds some fun color to that debate.

Posted by Luis Ahn on Dec 20, 2017 7:40:00 AM

Topics: From the Desk of Luis Ahn, Electric Cars

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Do Lofty Markets Imply Impending Pain?

Despite valuations in several sectors appearing stretched, stock markets continue to fly and defy any negative news that one would expect to rattle investor sentiment. As a follow-up to our previous blog on stretched valuations in international equity markets, we look into the valuations of European banks and the potential downside risk if the market corrects. While record high valuations could imply poor future performance, the earnings yield of European banks might justify further upside. For RIAs and other international equity investors, our goal is to better understand this risk-reward set-up and the potential implications for future returns.

Posted by Daeil Cha on Dec 19, 2017 11:43:26 AM

Topics: From the Desk of Daeil Cha

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“Gotta See it to Believe it”

Nothing seems to faze the market. Regardless of which market or asset class, the price appreciation continues with little regard for risk.For investors and asset allocators who are actually focused on risk management, this environment can be maddening. When a bull market, like the current one,subscribes to the belief that nothing materially negative can happen, it is abundantly clear that risk is being ignored.Below, we feature three different asset classes – Bitcoin, South Korean equities and U.S. volatility – as case examples. These are not meant to imply that markets will correct or that investors should be fearful. Rather, we highlight these extreme levels of complacency so that RIAs and other asset allocators will proactively analyze the risks hidden within their portfolios. Now is not the time to be lulled to sleep. 

Posted by Luis Ahn on Dec 13, 2017 5:21:58 PM

Topics: From the Desk of Luis Ahn

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3 Due Diligence Questions from an RIA

In person meetings between asset managers and investors are the most engaging and energizing parts of the due diligence process. That’s why we loved hearing that an RIA we know uses these face-to-face interactions to cut right to the chase about what is important to their firm when partnering with a mutual fund company.

The RIA asks 3 key questions:

1. What makes your team different and unique?

2. What makes your strategy different and unique?

3. What is a mistake you have made while managing the strategy and what have you learned from it?

Posted by Richard Pell on Dec 6, 2017 1:19:44 PM

Topics: From the Desk of Richard Pell, Due Diligence

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