Investment Strategies for a Low-Return World

Darden

The Richard A. Mayo Center for Asset Management will host the 2015 University of Virginia Investing Conference at the Darden School of Business in November, where financial experts from around the United States will discuss the theme, “Investing in a Low-Return World.” University of Virginia Investment Management Company (UVIMCO) CEO and Chief Investment Officer Lawrence Kochard provided a sneak preview of what investors are facing in the current environment at the 2015 Financial Panel in New York City.

“One of the big challenges right now is that we are in a very low-return world. I don’t think everyone necessarily realizes that,” Kochard said 17 June during the panel, which was hosted by the Virginia Club of New York and the Darden New York Chapter.

The question, though, is how can investors prosper — or at least tread water — while this low-return world persists. Kochard provided his insights on navigating the challenge.

  • Know thyself (when it comes to active versus passive investing). UVIMCO seeks active sources of returns through top managers it has invested with in the past and by investing globally. By taking an active investment approach, UVIMCO is able to deliver returns in the current environment at around 7.5 percent with the same level of risk as passive indices that are only delivering 4 percent returns. However, not all investors are capable of executing an active investment strategy, particularly individuals but also many institutions. Investors that are better suited making passive investments should adjust their planning to expect lower returns from their mix of bonds and equities.
  • Focus on the micro. Kochard said 9-11 ushered in the rise of “macroinvesting,” in which investors focus heavily on macroeconomic trends like terrorism or tax policy. However, too much focus on macroeconomic headwinds can paralyze investors. UVIMCO, instead, invests through managers “who are extraordinary at security selection” and tries to ignore the headwinds.
  • Don’t overpay for return certainty. Kochard sees a bubble in the demand for certainty that bonds and bond-like investment instruments provide. Through this demand, investors are bidding up prices for these yielding assets, which carry more risk than U.S. Treasurys while providing very little extra in return. UVIMCO elects to keep it simple by limiting its bond investments solely to Treasury bonds. As with virtually all bond and bond-like instruments in the current low-return world, Treasurys are generating a negative real return when factoring in inflation and costs of capital, but allow UVIMCO to avoid taking on more risk for little additional return.
  • Keep an eye on technology. While many sectors are stuck within the paradigm of a low-return world, some sectors are poised to soar. Kochard singled out technology as a promising sector and said finding those few “winner take all” tech companies early can provide strong returns.
  • Take note of companies buying back their own stock. Many companies have turned to this strategy to use capital due to a lack of confidence in making other investments. Kochard said share buybacks are not necessarily bad for investors who own stock in those companies, and can actually be a strong positive when companies have a history of spending their capital poorly.

The 2015 University of Virginia Investment Conference, “Investing in a Low-Return World,” will take place 12–13 November at the University of Virginia Darden School of Business.

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