Thursday, January 5, 2017

2016 was an amazing year to be a student learning about investment management!

AIM Students Received Valuable Investment 
and Risk Management Lessons in 2016

Since 2005 the students in Marquette’s Applied Investment Management (AIM) program have been actively managing a portion of the University’s endowment in the equity and fixed income markets. The students have performed well (a history of the performance of the AIM Funds since inception will be posted here soon).

All of the students in the AIM program have received valuable experience in evaluating and managing real investment portfolios. Each year there seems to be new risks that the students have to content with when managing the funds – and 2016 was no different than prior years.

The CME Group recently published an article on: Seven of the Most Noteworthy Trading Days of 2016 ( 

This article highlighted several of the most interesting trading days in 2016 – it generated many useful lessons for investors and risk managers. Here are examples:
1.       Political risk was probably the top market driver in 2016. As evidenced by the U.S. elections, UK Brexit referendum, and other elections across the globe political events drove equity and fixed income markets (as shown in the two charts below). As the CME Group points out, elections often involve binary choices, which in turn mean that pre-event return expectations may display bimodal characteristics.  For instance, if event A occurs then valuations are rates should go up; however if event B happens then prices and/or rates will go down. In any case there is a small likelihood that the markets will be flat once the outcome becomes known. 

Pre- and Post-Election US Financial Markets(click to enlarge)

Impact of UK Brexit Vote

2.      Policy risk was also in focus during much of 2016.  In the U.S., the anticipated actions of the Federal Reserve and post-election fiscal policy has moved markets significantly in the fourth quarter of the year.  In contrast, the other major central banks (ECB and BOJ) remain committed to aggressive easing.  These sharpening policy divergences moved markets in 2016 and will continue to be major drivers in 2017, including foreign exchange, commodities, interest rates, and equities markets.

Federal Reserve Rate Increase in December 2016

3.      Event risk was also evident in 2016 with OPEC’s unexpected announcement in the fourth quarter to limit oil production. The tensions in the energy markets were highlighted all through 2016 and oil prices were extremely volatile.  As the CME Group pointed out, Saudi Arabia attempted to reassert itself as the world’s swing producer – willing to cut production to support prices.  While U.S. shale producers have grown ever more efficient and can ramp up rig count and production when prices rise. Expect 2017 to contain numerous surprises that will impact commodity and financial markets.

Crude Oil Movement in 2016

4.      Secular, technology and weather/environmental risks continue to move markets. Changing demographics, disruptive technologies, emphasis on ESG, and changing global weather patterns are likely to emerge as major influences on financial and agricultural markets in 2017.  The CME Group article mentioned that the El Niño weather pattern of August 2015 left the scene in 2016, and signs of a developing La Niña with colder-than-usual waters along the equator in the Pacific Ocean, as well as large swaths of colder waters in the Northern Pacific Ocean, are expected to shift jet stream, temperature, and precipitation patterns yet again.

These are just some examples of the lessons learned by the AIM students in 2016 as they manage a global portfolio of equities and fixed income securities. Dr. David Krause, AIM program director has said that one of the most valuable aspects of the Applied Investment Management program is the experience gained by the students in evaluating investments and managing an active global portfolio. 

The students are appreciative of the opportunity to manage some of the University’s endowment – and they do so in a professional and responsible manner.

Let’s see how the AIM students fare in 2017! Happy New Year….. 

No comments:

Post a Comment