GLOBAL STOCK AND BOND INVESTING
Investment News and Trends

Events Cast Doubt on the "Decoupling Hypothesis"

In a recent "Global Commentary," Northern Trust pointed to the debate raging among investment advisors and economists," How far can other countries "decouple" from the U.S. economy and continue to post sustainable growth?

The question is important for a lot of reasons, not the least of which is the sentiment that international stocks may provide a safe haven from the problems gripping the domestic U.S. markets. If countries around the world begin to feel the effects of the American credit crunch and possible slow growth, investing abroad may not be such a sound strategy after all.

Northern Trust noted that the prestigious IMF and others have argued that the world can decouple because disturbances have been entirely in the United States. And if the weaknesses become severe, there are other policies that can be adapted to cushion the blow.

"Incoming economic reports suggest that this hypothesis may need to be revised," said the Northern Trust report.  It noted that some of Japan's leading economic indicators have fallen dramatically. And one official Japanese agency cited the U.S. mortgage problem as the cause.

In addition, factory orders in Germany fell off recently and so have retail sales in the euro-zone. "The nature of these economic reports suggest we need to keep an open mind about spillover effects on the world economy as the U.S. economy loses momentum in the months ahead," said Northern Trust.

Finally the European Union just announced that it is slashing its economic forecasts for the next two years. "Clouds have clearly gathered on the horizon with this summer's turbulence in the financial markets, the U.S. slowdown and the ever-rising oil prices," commented Joaquin Almunia, the union's economic and monetary affairs commissioner.
(www.northerntrust.com)

Demographic Trends Favor Equities Over Bonds - Morgan Stanley

Conventional wisdom has it that as investors approach retirement they and their advisors gravitate toward so-called safer investments, with allocations to bonds growing as allocations to equities shrink. But now some asset allocation experts are retreating from this position for two reasons - greater longevity and the cumulative impact of inflation during retirement.

According to experts at Morgan Stanley, aging in the developed world may favor equities over bonds. "While the popular notion among academics is that retirees prefer safer investments (i.e., bonds over equities), longevity risk could force retirees to take more investment risk, as it already has in Japan," says Stephen L. Jen of Morgan Stanley.

"While pension funds still hold more bonds than equities, the share of the latter has been rising rapidly," he adds.

Longevity has increased dramatically and continues to expand given the progress of advancements in health and medicine.  Now a person who retires at 65 may be able to live another 25 years; many will live beyond that. A person may work for 35 to 40 years during which time he will accumulate enough retirement funds to last 25 years or more at the lifestyle he and his spouse have set.  If he retires early, he could spend as many years retired as he did working. Thus investors eyeing retirement, and many already in retirement, are willing to absorb more risk in their portfolios.
(www.morganstanley.com)

Yale Endowment Way Up As Equities Head South

The Yale Endowment sits on top of the academic world when it comes to investing know how. Just recently it reported that returns had grown 28% for the fiscal year that ended June 30th. Its total value is $22.5 billion. David F. Swensen, the chief investment officer, is credited with moving the Yale Endowment toward greater investments in alternative classes such as hedge funds, private equity and hard assets like timber, oil and gas.

Stocks and bonds make up far less of the Yale Endowment portfolio.

The endowment is planning a small reduction in equities, from 12% currently to 11%, fixed income is at 4% while private equity will increase from 15% to 17% . Hedge funds will drop slightly from 25% to 23% while investments in real assets are at a 28% allocation.

More information on the investment strategies of endowments is available from the National Association of College and University Business Officers.
(www.nacubo.org)