As usual Walter Molano’s Latin American Advisor research note of September 6 was entertaining and thought-provoking. The topic was alpha, the risk-adjusted measure of excess return on an investment. The veteran analyst, who is head of research at sell-side firm BCP Securities in Greenwich, Connecticut, got quickly to the point: fund managers in emerging markets can no longer rely on performance through the pursuit of beta – the correlation of a particular asset or portfolio to the market as a whole. Instead they need to turn their attention to alpha.
Molano’s point was tied to an argument that a huge shift is taking place in the global economy. “The transformation of the global economy is making the search for alpha the modern version of the holy grail,” he wrote. While China and India represent the economic powers of the future, the US and Europe, though still dominant, are on a relative decline. A crossover, “fraught with volatility” will take place some time in the future.
“The problem,” says Molano, “is that the benchmark instruments are located in countries that are in decline.