Asset Allocation and Dumb American "Energy Policy"

The bankruptcy of American "energy policy" supports  two major facets of our asset allocation strategy: (1) underweight U.S. equities relative to global equities because of bad U.S. policy and other unprecedented problems for the nation, and (2) invest aggressively in companies working to solve the energy crisis, which will exist for even longer thanks to America's bankrupt "energy policy" (see our Environment link).

Today's column by Thomas Friedman in the New York Times explains perfectly the vacuity of "energy policy" debate in the U.S.   It's appropriately titled "Dumb as We Wanna Be":

• It is great to see that we finally have some national unity on energy policy. Unfortunately, the unifying idea is so ridiculous, so unworthy of the people aspiring to lead our nation, it takes your breath away. Hillary Clinton has decided to line up with John McCain in pushing to suspend the federal excise tax on gasoline, 18.4 cents a gallon, for this summer's travel season. This is not an energy policy. This is money laundering: we borrow money from China and ship it to Saudi Arabia and take a little cut for ourselves as it goes through our gas tanks. What a way to build our country

• When the summer is over, we will have increased our debt to China, increased our transfer of wealth to Saudi Arabia and increased our contribution to global warming for our kids to inherit.

• No, no no, we'll just get the money by taxing Big Oil, says Mrs. Clinton. Even if you could do that, what a terrible way to spend precious tax dollars -- burning it up on the way to the beach rather than on innovation?

• The McCain-Clinton gas holiday proposal is a perfect example of what energy expert Peter Schwartz of Global Business Network describes as the true American energy policy today: "Maximize demand, minimize supply and buy the rest from the people who hate us the most." Good for Barack Obama for resisting this shameful pandering.

• But here's what's scary: our problem is so much worse than you think. We have no energy strategy. If you are going to use tax policy to shape energy strategy then you want to raise taxes on the things you want to discourage -- gasoline consumption and gas-guzzling cars -- and you want to lower taxes on the things you want to encourage -- new, renewable energy technologies. We are doing just the opposite.

• Are you sitting down?

• Few Americans know it, but for almost a year now, Congress has been bickering over whether and how to renew the investment tax credit to stimulate investment in solar energy and the production tax credit to encourage investment in wind energy. The bickering has been so poisonous hat when Congress passed the 2007 energy bill last December, it failed to extend any stimulus for wind and solar energy production. Oil and as kept all their credits, but those for wind and solar have been left to expire this December. I am not making this up. At a time when we should be throwing everything into clean power innovation, we are squabbling over pennies.

• These credits are critical because they ensure that if oil prices slip back down again -- which often happens -- investments in wind and solar would still be profitable. That's how you launch a new energy technology and help it achieve scale, so it can compete without subsidies.

• The Democrats wanted the wind and solar credits to be paid for by taking away tax credits from the oil industry.  President Bush said he would veto that. Neither side would back down, and Mr. Bush -- showing not one iota of leadership -- refused to get all the adults together in a room and work out a compromise. Stalemate. Meanwhile, Germany has a 20-year solar incentive program; Japan 12 years.  Ours, at best, run two years.

• "It's a disaster," says Michael Polsky, founder of Invenergy, one of the biggest wind-power developers in America. "Wind is a very capital-intensive industry, and financial institutions are not ready to take 'Congressional risk.' They say if you don't get the [production tax credit] we will not lend you the money to buy more turbines and build projects."

• It is also alarming, says Rhone Resch, the president of the Solar Energy Industries Association, that the U.S. has reached a point "where the priorities of Congress could become so distorted by politics" that it would turn its back on the next great global industry -- clean power-- "but that's exactly what's happening." If the wind and solar credits expire, says Resch, the impact in 2009 would be more than 100,000 jobs either lost or not created in these industries, and $20 billion worth of investments that won't be made [and another generation of debt-dependent energy import-dependence---this time dependent on imports of wind and solar instead of oil]

• While all the presidential candidates were railing about lost manufacturing jobs in Ohio, no one noticed that America's premier solar company, First Solar, from Toledo, Ohio, was opening its newest factory in the former East German -- 540 high-paying engineering jobs -- because Germany had created a booming solar market and America has not.

• In 1997, said Resch, America was the leader in solar energy technology, with 40% of global solar production. "Last year, we were less than 8%, and even most of that was manufacturing for overseas markets."

• The McCain-Clinton proposal is a reminder to me that the biggest energy crisis we have in our country today is the energy to be serious -- the energy to do big things in a sustained, focused and intelligent way. We are in the midst of a national political brownout.

Allocation and Africa -- II

We continue to think "Frontier Markets" -- and African markets particularly -- will rise toward the status of an asset class for many investors. This stems from (1) low portfolio-correlation of many African stock markets owing to highly country-specific developments, and (2) the world's race for resources that is increasingly investing in African nations. We highlighted these trends here and primarily here.

A Bloomberg article today highlights the additional drive toward #2, investment in Africa. (It's also suggested in the article that China's model of investment, which does not concern itself with human rights, may still do more good than harm. It this standard continues to be adopted, it could clear-away a major hurdle to African economic that was not possible when America's liberal values predominated in previous decades.)

From Bloomberg: (China Fund May Pledge $1 Billion in African Investment in '08)

• A Chinese fund set up to encourage investment in Africa may commit to spend $1 billion by the end of the year, Liliang Teng, president of the China-Africa Development Fund said today.

  The fund is in discussions with Chinese companies on projects to improve energy infrastructure in South Africa, Mozambique, Zimbabwe and eastern Africa, Teng said in interview at a business forum in Tanzania's northern city of Arusha.

  ``Besides energy and power plants we will also focus on infrastructure, like rail, roads and airports as well as other areas, including agriculture and manufacturing,'' he said.

  The China-Africa Development Fund, announced by Chinese President Hu Jintao in November 2006, will grow to $5 billion and may become bigger depending on its initial results, said Teng. Financed by the China Development Bank, it approved the first investments with four Chinese companies totaling $90 million on Jan. 15, according to a press release on its Web site.

  Sino-Steel Group, the China Building Material Co., Shenzhen Energy Group Co., and the CGC Overseas Construction Ltd. will use the money to develop electricity, construction, and mining projects in Africa, the statement said, without elaborating.

  China's trade with African nations will rise to $100 billion by 2010 from $73 billion last year and $2 billion in 1999, Khalid Malik, the United Nations resident coordinator in China, said at the opening of the China Africa Business Forum in Arusha today. The two-day summit is bringing together 300 trade officials and businesspeople.

  Critics say China's push into Africa for oil and raw materials to feed its growing economy in some cases disregards environmental laws, labor standards and human rights.

  Economist Jeffrey Sachs, the UN's special envoy on the Millennium Development Goals, said the positive impact of Chinese investment and skills transfer to Africa far outweigh the negatives.

  ``What is being promoted is a great increase in business development,'' Sachs said in a taped address.

  To contact the reporter on this story: Sarah McGregor in Dar es Salaam via Johannesburg at 1933 or abolleurs@bloomberg.net

A Long Retreat from U.S. Equities is Continuing

In the last 25 years, Americans have steadfastly increased their exposure the U.S. equities, as the mutual fund industry matured and the cost of investing directly into stocks dropped. In 1980, only 6% of households held mutual funds, rising to 25% in 1990 to about 50% today. And far more people trade individual equities now than in the early-1980s.

That's the type of accumulation of an asset class that limits future returns, because there's less "money on the sidelines" available to drive demand for equities much beyond supply.

This trends are reflected in the following long-term P/E chart (below), which, toward the far right, shows valuations rising sharply from 1981 through 2001 (as investors raised their exposure to the asset class), and then retreating somewhat since then, and still not near a classic bear-market bottom by any means:


For a decade already, many of the world's savviest and nimble investors have owned far less U.S. equities as a percentage of total assets than the typical recommendation of 40-80% advocated for Americans saving for retirement, as referenced here for example. Lately, more of the largest and slower-moving institutional investors are shifting away from U.S. equities, as covered by Pension Risk Matters:

• [D]efined benefit plans are moving assets away from equity to alternatives and fixed income. In "CalPERS to shift $44 billion" (December 24, 2007), Pensions & Investments reporter Raquel Pichardo describes the giant retirement plan's move into international equity, real estate, private equity and a "new inflation-linked asset class." On April 17, 2008, New York Times reporter Mary Williams Walsh offers insight into what some of American's biggest plan sponsors are doing to manage market volatility. Referring to a new study by Evaluation Associates in "Market Turmoil Has Taken a Toll on Big Pension Funds," Walsh writes that General Motors, Ford, Boeing and Deere are a few of the large plans to turn from equities.

Retail investors, usually the last to move en masse, have also begun (but only just begun in the past year or two) to diversify away from U.S. equities, according to the latest fund flow data, and judging from the amount of money being injected into global, commodity and other new ETF varieties.

This process could have a ways to go before U.S. equities bottom, from a long-term perspective. Barclays Treasurer John Porter, being interviewed in Inside the House of Money, says:

• From a financial markets point of view, we're in a range type of stock market with a downward bias. People will become quite disillusioned with the financial markets. At some point, people are going to look to other things, like public service, the Peace Corps, or that type of thing, as opposed to getting an MBA or going into investment banking. These things tend to go in waves."
  

The process of moving toward this notion of a market bottom sounds painful for portfolios. But economic and financial dynamism will prevent a washout. In other words, we think investors will still make money in U.S. equity indices in the next five (+) years, but the trends we discuss above -- and other risks we discuss in previous posts -- will probably keep U.S. index returns in the low-single-digits.

We're overweight cash now, and gradually adding funds to a broad array of asset classes when each of them dips. In the last two months, we've added a bit to Developed Europe equities, Emerging Markets equities, Frontier Markets equities, municipal bonds, and environmental trend-driven equities (rather than high-yielding "real assets," as of yet). We're watching for entry points in Real Estate, U.S. Treasuries and TIPS (Treasury Inflation Protection Securities), and we're hunting for a top-performing and uncorrelated market-neutral equity fund and private equity fund.

Long Run U.S. Outlook Not Much Improved

It's been a long time (in blog terms) since we've argued for a strategic underweight of U.S. versus non-U.S. assets, but our view remains. America's serial indebtedness, its multi-trillion dollar war in Iraq, its narrowing borders to foreigners relative to its size, its stagnant state of public education, and its increasingly polarizing political tones are the main drivers. In our view, these major negatives slightly counter-balance America's tremendous entrepreneurial power (innovation and access to capital), its information intensity, and its economic diversity.

One of our favorite conduits, NakedCapitalism.com, has just produced a bevy of citations that make us increasingly concerned about the financial risks facing America. A few of the citations:

• An academic paper reviewing several hundred years of world history repeatedly found waves of sovereign debt criss hitting nations that (1) had received very large capital inflows to support very large indebtedness, and (2) existed in a global context of financial liberalization.
• A list of luminaries predicting worse-to-come as result of household and government debt.
• The risks and downsides of a currency losing its reserve status -- "Debasing the Dollar Will Accelerate America's Decline."

It seems that the blog's author, having correctly predicted (repeatedly) a severe financial crisis such as we experienced since late-'07, has now turned his guns on the longer-term fallout from the underlying problems that contributed to the near-term crisis.

There is a best course: America can reign in spending, and can save its way out of its debt. But the cost will be slower economic growth and higher taxes for years. We'd need to see strong evidence that it's happening before giving the nation credit for it, so to speak.

In the next five years, we think more funds (which have led the way already), financial planners, and self-proclaimed investment gurus will cite "world equity" as the core long-term asset allocation, rather than U.S. equities. Of course this shift has already begun to occur, but it has a lot further to go. We think we're still on the early side of the multi-decade "trade."

Another aspect of this "trade" will be the continued outperformance of well-run U.S. companies with superior international growth trajectories.

Coal "Renaissance" In Europe -- Keep Investing in Amelioration

The New York Times today summarized the coal plant building boom in Europe -- 50 plants on the drawing board over the next five years, and the numbers are growing because of rising prices for natural gas (a more carbon-efficient fuel source) and fears over energy security. This from a continent assumed to be leading the green movement make clear that the world is barreling down the path toward global warming. (Our post on Socolow and Pacala's "wedges" makes this clear.) Warming brings problems stemming from water loss, weather volatility, crop unpredictability and many other issues.

From The Times:

• The fast-expanding developing economies of India and China, where coal remains a major fuel source for more than two billion people, have long been regarded as among the biggest challenges to reducing carbon emissions. But the return now to coal even in eco-conscious Europe is sowing real alarm among environmentalists who warn that it is setting the world on a disastrous trajectory that will make controlling global warming impossible....
• “Building new coal-fired power plants is ill conceived,” said James E. Hansen, a leading climatologist at the NASA Goddard Institute for Space Studies. “Given our knowledge about what needs to be done to stabilize climate, this plan is like barging into a war without having a plan for how it should be conducted, even though information is available.

Reminders such as these keep us focused on the major investment themes we highlight under the Environment subject of this blog, including agri-biotech, solar, tech-driven energy efficiency, water, filtration and other areas. (We'll go so far as to keep an eye on speculative startups such as CO2 Solution (CST), which is trying to develop a form of carbon sequestration. At some point in the future, it will become clear to governments that it will be far cheaper to sequester coal-plant CO2 than to replace existing capacity with alternative energy, above and beyond what's already being installed.)

Another Stake In the Heart of "Peak Oil" Deniers

If last week's confession by a Lukoil official that Russian oil production has peaked weren't enough to convert "peak oil" deniers, today's comments by Saudia Arabia ought to do the trick. (See the WSJ article here.) As a result, energy prices should continue their steady march upward at a much faster clip than other asset classes (at least until the oil "supply shock" hurts demand enough, which we think will happen later in '08).

So, strictly speaking, our market-weight energy position since starting this blog will remain a drag on relative performance, unless it becomes clear that oil demand is slowing down much more sharply than oil supply. That probably won't happen in the next couple of months, at the rate nations are pursuing inflationary and energy-inefficient policies around the world, and given the rising cost of extracting an incremental barrel of oil.

That said, we haven't raised our energy weighting. We're seeking to "mimic" the performance of rising energy assets with assets that instead improve resource efficiency, reduce industry's carbon & pollution footprints, and create a more sustainable world. To that end, we've written about investments along several major themes, such as agri-biotech, solar power & some other alternative energy platforms, water infrastructure & irrigation technology, green electronics, and others (scroll through our Environment subject for detail).

In addition to "mimic-ing" the performance of rising energy assets, we think these investments could decline less than the energy sector if the global economy slows down enough to drag the energy sector down, because the major environmental investment theme should remain intact.

But we have a lot more work to do before making up for being market-weight energy, rather than overweight, because traditional energy can get more expensive, and still be cheaper than alternative energies. So we're extending our environmental investment themes to include another industrial efficiency play (FLIR Systems - FLIR), and several high barrier-to-entry environmental collection and processing networks (including Clean Harbors - CLHB, and Darling International - DAR). Note that Darling, which collects and processes animal bi-products from thousands of sources, sells into many product categories as a replacement of fossil fuels, and enjoys rising average prices as a result.

One Parched Place, Many Major Investment Themes

The following brief Reuters story about the Catalan region in Spain helps demonstrate why we want to own leading companies dealing with water infrastructure, irrigation, agri-biotech, and resource efficiency (see our earlier post for specifics).

The Reuters story:

• Spain plans pipeline to avert Catalan water crisis.
  BARCELONA (Reuters) - Spain unveiled plans on Friday to build a pipeline to relieve drought-stricken Catalonia and prevent Barcelona running out of drinking water, but other regions are up in arms in what media have dubbed a water war.

  The pipeline will take water from the mouth of the Ebro River to Barcelona, the Catalan regional capital. A hosepipe ban has already been in force for weeks and picturesque fountains have run dry in the city, a popular tourist venue.

  The government said on Friday the situation in Barcelona was an emergency.

  "If we don't act, the citizens of Barcelona will be without drinking water in October," said First Deputy Prime Minister Maria Teresa Fernandez de la Vega, speaking at the maiden weekly press conference of the newly re-elected Socialist government.

  Reservoirs in northeast Catalonia are just 20.1 percent full after four years of drought, according to the latest official data, or just 0.1 percent above emergency levels. One Catalan reservoir is so dry that a village has reappeared after being under water since the river flowing through it was dammed.

  Catalonia's department of the environment on Thursday said recent rainfall after a dry winter would only be enough to postpone emergency measures for some weeks.

  WATER IMPORTS

  The new pipeline is not due to be completed until October, however, and Catalonia already has plans to import water to Barcelona by sea beginning in May and by rail in August.

  The plan ends weeks of wrangling between the central government in Madrid and authorities in Catalonia. But it has angered the heads of regional governments further down the Mediterranean coast in Valencia and Murcia, who say they will demand equal access to the Ebro in the Constitutional Court.

  The Socialist government denies favoring Catalonia -- whose regional parties are its allies in parliament -- over conservative Popular Party-led governments in Murcia and Valencia. It says the new pipeline will not deplete the Ebro because it will channel surplus water recovered by installing more efficient irrigation pipes used by farmers.

  "People from Barcelona have the same rights as every other citizen -- not more but not less," said de la Vega. "It's the responsibility of the government to make sure the whole of Spain fairly shares resources that belong to everyone."

  Adding to the government's headaches are protests from farmers in the Ebro delta on whom the plan hinges. Many say they cannot stop irrigating to lay new pipes now that the growing season is under way.

  The delta is known for growing rice, an essential ingredient in renowned dishes from Spain's Mediterranean coast like paella.

  "We don't want to be selfish, but rice is life itself in the delta. The government has had years to act, and now they have acted late and badly," said Rosa Pruna, head of the influential ASAJA farmers' union in Catalonia.

  (Additional reporting by Sonya Dowsett, editing by Mark Trevelyan)

Adding Equity Exposure While "Muddling Through" Crisis

Each day that brings a bit more reassurance that the financial crisis won't turn into a catastrophic melt-down represents a good day for markets, after investors fear the worst for much of 2008.

So, even though we're arguing for being underweight equities until one's semi-annual asset allocation rebalance, we've posted about adding equity exposure gradually, and to gain exposure to major investment themes that should combat the economic cycle and provide high beta if markets turn bullish.

During the week of March 31-April 4, we highlighted the Agriculture theme [specifically agri-biotech Monsanto (MON) and Syngenta (SYT)], the length of the Africa & Middle East theme (TRAMX), and the value of adding some U.S. index exposure (VTI). We also were tracking Water, Solar, Genomics, China, Brazil, Canada and other areas.

This week we extended many of those themes, and are also highlighting Suez (SZEZY - a global utility and water infrastructure company), Lindsay (LNN - a high-tech irrigation equipment company), Itron (ITRI - a global utility metering equipment company), and Origin AgriTech (SEED - a Chinese seed company with substantial "option value"). This week we also saw decreased risk in adding exposure to European (VGK), Emerging Markets (VWO), and Brazil specifically (EWZ).

High Expected Returns from Investing in the Environment

One of our favorite blogs, NakedCapitalism.com, called our attention to a global energy study by the McKinsey Global Institute, titled "The Case For Investing In Energy Productivity." See the summary slideshow by McKinsey's Diana Farrell, given at the 2008 Investor Summit on Climate Risk.

The report says that the costs of solving climate distress and high energy prices are very manageable, but that mis-aligned incentives, mis-perceptions about return on investment, weak policy, and lack of education generally have deterred the investment process...

...Until now, we believe. That is why, despite big gains in equity value enjoyed by a diverse range of efficiency & environmental solutions providers, we think high equity returns will continue in a many of the areas. As a result we've selectively boosted our equity allocations (see our previous post, "Environmental Boom Ignites Stocks").

From the McKinsey report:

• Unless there is a shift in world energy policies, global energy demand is set to accelerate, putting increasing strain on the world economy and the environment. Yet additional annual investments in energy productivity of $170 billion through 2020 could cut global energy demand growth by at least half—the equivalent of 64 million barrels of oil a day or almost one and a half times today’s entire U.S. energy consumption.

• MGI research suggests that the economics of investing in energy productivity—the level of output we achieve from the energy we consume—are very attractive. With an average internal rate of return of 17 percent, such investments would generate energy savings ramping up to $900 billion annually by 2020. Energy productivity is also the most cost-effective way to reduce global emissions of greenhouse gases (GHG). Capturing the energy productivity opportunity could deliver up to half of the abatement of global GHG required to cap the long-term concentration of GHG in the atmosphere to 450-550 parts per million—a level experts say will be necessary to prevent the mean temperature from increasing by more than two degrees centigrade. Moreover, the opportunities to boost energy productivity use existing technologies that pay for themselves and therefore free up resources for investment or consumption elsewhere.
  

• The capital required appears to be well within reach. The annual sum is equivalent to some 1.6 percent of global fixed-capital investment today, or 0.4 percent of current global GDP.
  

• MGI finds that global industrial sectors need just under half of the total capital required to capture the energy productivity opportunities we have identified—$83 billion a year. Residential sectors around the world need some $40 billion a year, roughly one-quarter of the total. The capital needs of commercial and transportation end-use sectors are smaller at $22 billion and $25 billion a year, respectively. Breaking down capital requirements geographically, developing regions represent two-thirds of the incremental capital needed, with China alone accounting for $28 billion or 16 percent of the total $170 billion annual requirement. The United States accounts for $38 billion or 22 percent of the total.

• A wide range of energy-market failures currently discourage consumers and businesses from embracing higher energy productivity, and they deter investors from making the capital outlays that would help end users to overcome initial financing barriers. These market failures include fuel subsidies that directly discourage productive energy use, a lack of information available to consumers about the kinds of energy productivity choices that are available to them, and agency issues in high-turnover commercial businesses.
  To overcome today’s barriers to higher energy productivity MGI identified four areas for action: setting energy efficiency standards for appliances and equipment, upgrading the energy efficiency of new buildings and remodels, raising corporate standards for energy efficiency, and investing in energy intermediaries.
  

(We can identify other avenues for boosting not only energy productivity, but resource productivity generally.)

Also pertinent on the McKinsey Global Institute page:

• Leapfrogging to higher energy productivity in China
• Wasted energy: How the U.S. can reach its energy productivity potential
• Curbing global energy demand growth: The energy productivity opportunity.

Also from the 2008 Investor Summit on Climate Risk:

• Unleashing The Business Potential for Clean Energy (an excellent slideshow by the International Energy Agency, which focuses on the business case for efficiency technologies)
  

Environmental Boom Ignites Stocks

Earlier today (4/16/08) stocks of companies that address the world's biggest environmental challenges soared more than the market averages. It's as if thousands of investors suddenly read Jared Diamond's Collapse (focusing on agricultural productivity) and the Socolow and Pacala paper (on ways to save the earth seven billion tons of carbon emissions), then invested accordingly today...

...Stocks like Monsanto (+7%) and the agri-biotech sector (+3-4%), First Solar (+4%) and the solar sector (+3-7%), the broader alternative energy sector (+3-15%), Badger Meter (+20%) and the metering sector (+3-7%), Lindsay (+6%) and the water sector (+3-4%), the engine and air filtration industry sector (+3-5%), the green electronics sector (+3-15%), and so on.

We'd still be adding to equity weightings selectively in key industries backed by major secular trends, as suggested by several of our latest posts (including here). See also our post titled "Climate Change -- Investment Waves Will Keep Coming" and our April 4th post after an earlier increase in environment-related equity allocation.

Today it's as if investors were struck harder than ever by the imminent major implications of skyrocketing energy prices and global warming. It makes perfect sense. Crude oil punched to $115/barrel on supply projects. Yesterday, a paper presented at the European Geosciences Union conference predicted a rise in sea levels three times higher than predicted by the U.N.'s Intergovernmental Panel that won the '07 Nobel Prize -- a full 0.8-1.5 meters that would have massive consequences for hundreds of millions of people and economies. Today, Bush, seemingly the last and most important global-warming-denier, finally highlighted the need to constrain greenhouse-gas emissions, in a speech that emphasized the need to invest in technologies (such as carbon capture and sequestration -- see some of the market's inferences, above) and his seemingly increased willingness to sign binding international agreements.

Climate Change -- Investment Waves Will Keep Coming

Lest there be any doubt that there will continue to be exponential growth in investment allocation toward securities that address and/or exploit climate change, we attach the following from a March 27 article in FT (DeAm plans green private equity fund, by Deborah Brewster):

• Deutsche Asset Management, the $800bn fund unit of Deutsche Bank, plans to launch the world’s first private equity fund specialising in climate change, or green investments.

  “We’re developing the product,” Kevin Parker, DeAm chief executive, told the Financial Times. “We are already the biggest climate change investors in the world. That has happened really in just the past 18 months.”

  The move dovetails with DeAm’s commitment to climate change as a potentially huge investing trend and with its desire to develop more products in the higher-margin end of the asset management business.

  DeAm last year took a minority stake in a private equity firm. It also launched a private equity funds of funds. The green fund will be its first direct private equity fund. “The $12bn we have in climate change is almost exclusively retail,” said Mr Parker. “We want to broaden this to institutional. We intend to be leaders in the space in both retail and institutional.”

  “For us to go into private equity today, with no track record and so many established players already there, is probably not a smart move,” he said. However, climate change was a new area and uncharted territory. “Nobody has a track record, so we could be at the starting line with Carlyle and Blackstone and the other big guys.”

  He said climate change investing incorporated a broad spectrum including green technology, agriculture and infrastructure related to alternative energy. “It lends itself to multiple products to create. We can roll them up into a diversified strategy around climate change.”

  Financiers and insurance companies, he added, were starting to recognise the problem of carbon emissions and fossil fuels and this would result in rapid change in the area. “If you can’t finance it and you can’t insure it, it probably isn't going to get built.”

  Mr Parker said asset management divided increasingly between low-margin indexed products and high-margin absolute return products, with hedge fund-like strategies offering performance incentives.

  “On one side you have exchange traded funds and on the other you have [private equity firm] Blackstone and the hedge funds,” he said. “It leaves firms like ours, traditional long-only buyside firms, needing to make some very tough decisions. The growth in the traditional segment is far outdistanced by the growth in passive strategies and by the growth in alternative strategies.

  “You’re going to have absolute return products and you’re going to have passive products – and what’s left in the middle is an endangered species.”

NOTE: At some point, hot sectors that attract too much new capital and create too much supply of new securities are bound to come back to earth. We think that's a long way off in a world where our traditional fossil-fuel energy infrastructure needs to be gradually replaced.

Allocation and Currencies?

How long before currencies are widely treated as an asset class? The question is crucial because finding new asset classes -- shortly before institutions begin treating them that way -- can be a very lucrative strategy. (For example, Energy commodities have skyrocketed in part because of institutions beginning to treat them as an asset class in the past five years).

Most institutional money managers and asset allocation advisories don't count currencies as an asset class, in that they don't apportion a percentage of their assets exclusively for currency investments. Currency is still a crucial part of all international investors' considerations, but it's usually not treated as a separate asset class by investors other than globally-oriented hedge funds.

Why not? After all, currencies frequently provide a source of significant alpha and uncorrelated returns. And some investors do extremely well in currency investing. For example, in Inside the House of Money, the manager of a significant family investment fund, Falcon Management, says:

• [F]oreign exchange is a whole area of risk premia that none of the real money [long only] funds are earning.
• Back to the smart real money (long-only] funds, Yale has seven asset categories where they look to extract risk premia and Harvard has eleven. The question is, why doesn't Harvard throw in a twelfth category? They should be looking at other uncorrelated markets such as foreign exchange for more sources of risk premia. Once they identify new sources, they can allocate X% and, in a Markowitz sense, run an efficient frontier to come up with what the correct allocation should be. But they don't do it. Asset categories like foreign exchange or options are not thought of as an asset category where risk premia can be earned.
• As a hedge fund, we'll look anywhere for opportunities. The currency markets are a place where global macro hedge funds especially earn risk premia. I can name three risk premia in currencies that I don't think any real money manager has ever attempted to earn on a systematic basis: (1) High yielding versus lower yielding currencies.... 92) Short-dated volatility is too high because of an insurance premium component in short-dated options....(3) Longer-dated options are priced expensively versus future daily volatility, but cheaply versus the drift in the future spot price....

The Falcon manager, Jim Leitner, notes there's significant value to be extracted from currency markets (indeed many asset classes) over time:

• The large inefficiencies do not get arbitraged out because there's very little capital that actually gets allocated toward extracting value over multiple years. Everybod who's allocating money to hedge funds has monthly or quarterly redemption clauses, which force hedge funds to manage to those liquidity paramaters, and that's not at all the way to wealth.

Things are starting to change, and will probably continue to. The U.S. dollar's precipitous multi-year slide versus other major currencies is forcing more money managers to think about creating asset allocations for currency. Moreover, ETFs tracking currencies are rapidly appearing.

The traditional reason why currency isn't regarded as an asset class is that there's no "expected return." The currencies taken together are a "zero-sum" game, versus other asset classes where everyone can win. But for some investors, active management of currencies are creating consistently strong returns that institutional asset allocators (such as pension funds, insurance companies, charitable organizations, etc) may stop ignoring.

Commodity Prices, "Resource Nationalism" and Extended Economic Slowdown

The following chart from VoxEU.org shows the number of oil expropriations (the bars) and oil price deviation from long-run trend, 1910-2006. The gigantic wave of government expropriations in the 1970s, and the latest upticks to the far right of the chart, could indicate a very significant trend in the next few years.

(We think this is part of a trend toward greater protectionism. Our recent posts discussed this with regard to agriculture lately. The world noted the worrisome development of the U.S. postponing a trade agreement with Columbia this week. U.S. Democratic Presidential candidates are running on a protectionist ticket. Etc)

The consequence of continued nationalization of energy resources could be yet another impetus to commodity prices in the next couple of years -- via decreased production efficiency and less international trade -- until the growing bottlenecks result in a deepening global economic slowdown that significantly damps demand, as occurred in the '70s. We don't know when the impetus will be fully offset by the economic fallout. That is why we're not getting more bullish on Energy investments currently.

Chart (from VoxEU): Number of oil expropriations and oil price deviation from long-run trend, 1910-2006


Macro consequences: (1) another impetus to high energy prices despite the economic slowdown, (2) extended economic slowdown, (3) accelerating push toward "alternative energy," commodity yield enhancement of all kinds, booming resource optimization technologies and business practices.

Consequences for Asset Allocation: (1) Not overweight energy, but need to continue to guard against being underweight energy (see our previous post), (2) Need to identify investment opportunities in alternative energy and resource optimization, (3) Otherwise, need to be overweight counter-cyclical investments, rather than chase cyclical rallies that occur during the potential bear market -- We believe we're still only in the middle of the current financial crisis, which won't signal a "beginning of the end" until additional shoes drop. We don't plan to fully rebalance our underweight equity position at our mid-year rebalance, unless more of the crisis plays out before then.

Allocation and Energy Update

As the case strengthens for a continuing long-run trend in higher energy prices -- even though the global economy will continue its cyclical slowdown -- many individual investors may be surprised at how lightly their diversified equity portfolios are weighted in the energy sector.

We reviewed this data again this week, and it was one of the reasons why we're rebalancing our overweight energy position in accordance with our strategic allocation, rather than cut too far.

• The U.S. Energy sector comprises only 12.7% of the Vanguard Total Market Index Fund, which tracks the Wilshire 5000. Although this is up from 9.1% a year ago, it is still roughly on part with Health Care and Industrials, and well below Technology (15.7%) and Financials (17.4%).
• The rest-of-world Energy sector comprises only 10.4% of the Vanguard FTSE All-World-ex-US fund. This is on a par with Industrials and Materials, and far below Financials (28.7%).

Another reason to adhere to one's strategic energy allocation, rather than market-time a cut in weighting, was yet another in a litany of "economic nationalism" updates: China's roughly $60bn deal to secure LNG from Qatar over 25 years. For perspective (from the FT article):

• “Three to four years ago, the Qatari projects were going to send this gas to the Atlantic Basin, particularly the US,” said Frank Harris, of Wood Mackenzie, the Edinburgh-based consulting firm. “What it means is that we are going to see a lot less LNG go to the US than we thought.”

The SPDRS Oil & Gas Exploration & Production ETF (XOP) is an equity investment that has typically provided the most leverage to changes in long-run oil and gas price forecasts. The companies are engaged in upstream activities to locate and produce, which is where the global bottleneck in the energy chain is. The tremendous intellectual property required of these companies -- particularly in the increasingly difficult-to-access geologies -- gives these companies more protection from price-based competition.

We are also weighing environmental issues. On one hand, profits generated from traditional energy are being invested increasingly in "alternative" energy projects, as the economics of alternative energy comes closer to parity with traditional energy. Some traditional energy companies are therefore becoming better positioned to benefit from the diversification of energy sources that the world is beginning to undergo. However, until world governments more effectively price the externalities of the energy business (such as C02 emissions, contaminant emissions, and water -- all of which energy companies use intensively), the energy companies will continue to benefit disproportionately at the expense of sustainable life on earth.

Asset Allocation and Sustainability

The emerging investment class outperformers will exist where giant bottlenecks are taking hold.

Right now, the most obvious example is in fossil fuels, where prices continue to rise faster than general inflation, because of the increasingly credible view that earth's "peak" annual oil production is upon us, or behind us.

A whole array of emerging investment class outperformers are forming around earth's pending environmental disasters. There are many approaches to identifying them. For example:

• (1) Issue-by-issue: We've highlighted agriculture supply/demand pressure emerging from not only demographic shifts but also weather volatility and dessication driven partly by global warming. Another "issue" example is water scarcity, and we've also highlighted some investment implications of this.
• (2) Sizing earth's needs: Our recent post "The New S&P, and Earth's Fate" highlighted another conceptualization of investment landscapes and earth's sustainability. The "S&P" is Socolow and Pacala's article on ways to reduce CO2 emissions by 7 billion tons by 2054 -- in 1 billion ton increments or "wedges."
• (3) Price of C02. Today we're highlighting a crucial debate, blogged in "Climate Progress" beginning on April 8, of what price C02 will need to be and what kind of technological breakthroughs will be needed to prevent C02 from rising above 450 parts per million in earth's atmosphere. 450 ppm is the level at which earth's future becomes much less predictable, and potentially disastrous. The global and regional carbon policy and credit debate outcomes will go a long way to informing investors where to place their bets. A high price of carbon will only accelerate investors' demands for solutions, and this will accelerate investment returns for those who invest accordingly.

Our view is that asset allocators -- and investors of all stripes -- will pay increasing attention to the environment and sustainability initiatives.

When Are "Food Export Barriers" Simply "Protectionism"?

Despite the cracks in Alan Greenspan's reputation because of the credit bust and regulatory negligence he fostered, it's worth focusing instead on his repeated warnings against erecting barriers to trade. He frequently stated that a resurgence in trade barriers was the one poison he feared most. Today he reiterated those sentiments to the Senate Finance Committee, and how destructive it would be reverse the wealth-generating tide of the past two decades of trade liberalization.

If the rapid spike in food export barriers (part of what's been happening in the past couple of weeks) creates an even larger contagion of protectionism, ill-feelings, and tit-for-tat among nations than it already has, global economic prospects will quickly darken and become more volatile. This article on Asia Business Newswire today points how quickly the risk of protectionism is rising.

(It is also a reminder of how owning the food commodities and commodity-linked securities may become an even more important element in an optimal diversified portfolio.)

• Sydney, Apr 4, 2008 (ABN Newswire) - Across the developing and emerging economies of the world, and in some developed economies for that matter, governments are opting to shoulder some of the burden of higher food prices or try and control their immediate direction.
  
  The efforts are likely to be fruitless and very expensive for the countries involved, consumers and taxpayers.
  
  From India to Egypt governments are slashing import tariffs on foodstuffs and curbing exports, as well as boosting subsidies: all to try and ease the impact of what will be the big story of 2008 and 2009 - the soaring cost of food.
  
  As we reported this week, an exploding price for rice is the latest cause of much government action.
  
  Egypt, India, the Philippines, Vietnam, Indonesia, Cambodia, parts of Africa, Mexico, Italy, China, Russia, Argentina: the list is growing by the day of governments who now see the rising cost of food and all the social and political problems that brings, as far more important that good governance, low debt, the US recession, subprime debt or American foreign and economic policy.
  
  Even in the developed world the impact is startling. Biofuels in Asia, Europe and the US are withering because of rising costs for corn, canola and palm oil. Food riots have happened in Mexico over the cost of tortilla flour. Italians have protested about the sharp rise in the cost of flour for pasta and bread.
  
  Farmers are being blamed in some countries, such as Argentina and parts of Europe; in the US it's causing an explosion in land values and incomes in parts of the country that have been slowly withering away.
  
  The irony won't be lost on Americans that in the midst of a recession farmers and some of the biggest companies in the US (think Cargill and Archer Midland) will be booming, some with record incomes, and much of it (like Europe) subsidised.
  
  Longer term, however, the side-effects of this largesse will be ugly. Forgoing revenues and paying subsidies hurts national budgets.
  
  India, for example, spent $US600 million on rice and wheat subsidies in 2004-05. Given the surge in rice, maize and wheat prices since then, the cost could be up by a third to a half: something approaching $US1 billion, which a country like India can ill afford, even in the midst of its boom (which is slowing anyway).
  
  In the Philippines, the rice subsidy could top the half a billion dollar mark this year, according to the Asian Development Bank, and the country is scouring Asia and the US for around 1.5 million tonnes of rice at subsidised prices because its stocks have run down.
  
  Indonesia which is thinking of banning some rice exports, like China, India, Vietnam and Egypt, may have to pay $US2.2 billion in food subsidies this year, or around 3% of spending by the national government.
  
  That's three times earlier estimates.
  
  Nearby Malaysia is looking to boost rice imports and hitting a wall because the Philippines has been mopping up as much grain as it can get.
  
  Indonesia and many other countries in Asia also subsidise energy costs and they have skyrocketed with the rise in oil prices over the past three years.
  
  Indonesia is thinking of cutting rice exports, even though it will have a surplus this year of around two million tonnes (it imported just over 1 million tonnes in 2007).
  
  Soaring food and fuel prices are driving global inflation. Consumer prices in China hit an annual rate of 8.7% in February, an 11-year high, and reached a 13-month peak in India of 6.8%.
  
  World prices for rice, wheat, soybeans and corn have all increased sharply: rice and wheat prices have doubled in the year - rice is up 30% or more in a week....
  
  The World Bank said this week it considered soaring food and fuel prices as greater challenges to East Asian governments than the financial turmoil in the United States and slowing global growth.
  
  As we said yesterday, it's a similar outlook from the Asian Development Bank.
  
  "The major risk lies not so much in softer growth but in rising commodity prices and accelerating inflation,'' the Bank said yesterday. "Appropriate macroeconomic responses to accelerating inflation are likely to include tighter monetary policy and some exchange-rate appreciation.''
  
  "Indeed, published inflation rates disguise the true extent of underlying inflation pressures due to the presence of subsidies, administrative price controls and cuts in excise taxes," it said.
  
  The subsidies used by many governments in the region to cushion the impact of soaring fuel and food prices are posing a threat to budgets and the bank said that cash handouts to the poor may be a better and cheaper option.
  
  "If governments do not rethink these expensive and inefficient subsidy programs, fiscal costs could escalate sharply and require painful adjustments (or accelerating inflation, or both) later," the ADB said.
  
  "Carefully targetted direct income support for the poor, within strict budgetary limits, might better alleviate stresses, and at much lower cost."
  
  Saudi Arabia has cut import taxes across a range of food products this week, slashing its wheat tariff from 25% to zero and reducing tariffs on poultry, dairy produce and vegetable oils.
  
  On Monday, India scrapped tariffs on edible oil and maize and banned exports of all rice except the high-value basmati variety, while Vietnam, the world's third biggest rice exporter, said it would cut rice exports by 11%.
  
  In Argentina, farmers called off a protest against attempts by the government of President Cristina Fernández to redistribute the benefits of rising commodity prices by increasing export taxes on soybeans and other crops.....
  
  

"Food" Smells Like "Oil"

We think Agriculture commodities are likely to deserve standalone designation in some asset allocations.

We expect food supplies to become less predictable and more expensive in the coming years because of the many trends we've highlighted (Food Prices, Continued and Allocation and Agriculture and elsewhere), such as increasing demand for grains and grain-intensive meat, biofuel demand, worsening water scarcity, higher fuel prices, soil conservation problems, climate changes and erratic weather, and other issues. When ag prices settle down, another circumstance or crisis will force them back up again, much as we've seen with oil prices in the past five years. We think new acreage and science will help solve the problem, so we're focused on some of the companies that should help (like Monsanto and Syngenta).

But even new capacity and science probably won't prevent a bullish multi-year trend in ag prices. Another update in the FT today regarding rice prices highlights the severity of the issue. Nations that are short rice supplies will be more assertive in procuring grain supplies from other sources, and that will keep an upward bias to food prices.

From the FT ("Rice jumps as Africa joins race for supplies")

• Rice prices rose more than 10 per cent on Friday to a fresh all-time high as African countries joined south-east Asian importers in the race to head off social unrest by securing supplies from the handful of exporters still selling the grain in the international market.

  The rise in prices – 50 per cent in two weeks – threatens upheaval and has resulted in riots and soldiers overseeing supplies in some emerging countries, where the grain is a staple food for about 3bn people.

  The increase also risks stoking further inflation in emerging countries, which have been suffering the impact of record oil prices and the rise in price of other agricultural commodities – including wheat, maize and vegetable oil – in the last year.

  Kamal Nath, India’s trade minister, said the government would crack down on hoarding of essential commodities to keep a lid on food prices. “We will not hesitate to take the strongest possible measures, including using some of the legal provisions that we have against hoarding,’’ he said on Friday.

  Thai medium-quality rice, a global benchmark, traded at about $850 a tonne on Friday, up from $760 a tonne last week, while the price of less representative top-quality aromatic rice broke the $1,000-a-tonne level for the first time, traders said. They added that the grain was being sold to African destinations.

  In Chicago, US rice futures hit an all-time high of $20.45 per 100 pounds.

  Although only a small amount of the grain is traded internationally, the rise in Thai prices signals the trend for the global market and also for domestic prices in countries where local production is enough to meet demand.

  The price jump came as leading exporting countries, including Vietnam, India, China and Egypt, banned foreign sales. Hanoi extended its ban for two extra months until June.

  Food aid officials said consumption could rise further because record food prices are forcing families to move from a diversified diet to just one staple.

  Farmers delaying their harvest and middleman hoarding stocks are also contributing to the crisis, said governments and traders.

  In the past weeks, traders and diplomats have warned that many West African countries, where rice is a staple, had yet to purchase the grain this year, leaving them subject to record prices now.

Tax-sensitive investors will look at ETNs rather than ETFs. Two of them are iPath Dow Jones AIG-Agriculture ETN (JJA) (and the narrower JJG - Grains) and ELEMENTS Linked to the Rogers International Commodity Index - Agriculture ETN (RJA).

We recognize that asset allocators will often want to inflation-hedge using TIPS, which hedges against broad CPI inflation. But we also think Ag prices could outrun CPI for years, and that Ag commodities will grant more robust inflation protection.

Of wider interest to asset allocators is the extent to which ag commodities are both signifying and creating greater risks to global equity and bond market returns. This increases the importance of owning commodities or commodity-linked securities in a high-performing optimal portfolio.

Slight Increases in Equity Allocation This Week, But Still Underweight

As the "muddle through the credit crisis" hypothesis gained a bit more credibility this week, it made sense to boost equity allocations somewhat, though we remain partial to the underweight argument.

We've tried to raise equity allocations via gaining exposure to diverse major investment trends, including:

• Agriculture - Monsanto (MON) and Syngenta (SYT), two of the leaders in agri-biotech. We summarize the major trends here ("Allocation and Agriculture"). We're also watching two agriculture ETNs: iPath Dow Jones AIG-Agriculture ETN (JJA) and ELEMENTS Linked to the Rogers International Commodity Index - Agriculture ETN (RJA).
  
• Africa & Middle East (a broad fund with some "frontier" market exposure.) See our previous post titled Allocation and Africa.
  
• U.S. - Vanguard Total Stock Market ETF (VTI), a Wilshire 5000 Index tracker - Selloff provided a better probability of a long-term entry point.

We're looking for further opportunities in these areas, as well as some additional ones, such as:

• Water and Industrial Processes - Flowserve (FLS), a leader in pumps, flow control and other flow solutions; sells into a diverse industrial end-market. Suez SA (SZE) a France-based utility planning to separate its diversified global water business.
  
• Solar - FirstSolar (FSLR) may pull back after recent flare-up after CEO's comments that he is in project talks with several large utilities. We certainly believe him -- coal-fired power projects are coming off the drawing boards as expected carbon costs rise, nuclear projects aren't being added quickly owing to NIMBY, and oil/gas/hydro prices continue their uptrends -- but collaborations with utilities may take a while to develop.
• Genomics - Illumina (ILMN), a leader in genetic analysis. Find a brief description of this super-trend here: "New Technologies Spur the Race to Affordable Genome Sequencing," as well as the backdrop for a very long-term view here on combating the increasing risk of plagues using new antibiotics, genetic testing, and anti viral drugs.
• China (PGJ, consisting of 25 ADRs) - 40% selloff from peak provided a more fair discounting of the risks, which we've discussed in several previous posts.
• Energy - SPDR S&P Oil & Gas Exploration & Production ETF (XOP), Vanguard Energy ETF (VDE), or iShares S&P Global Energy Sector (IXC)
  
• Canada - iShares MSCI Canada Index (EWC)
• Brazil - iShares MSCI Brazil Index (EWZ)
• Education - ITT Industries (ESI), a well-managed company at a 40% discount to its peak, and up sharply today after Congress introduced a new student loan aid bill. Good summary of Education credit issue here.

Allocation and Africa

At this rate, it won't be long before many more investors are breaking out "Africa" (even excluding South Africa) as a region unto itself in their asset allocations, rather than lumping it with Middle East, Developing Europe and other regions.

Tens of billions of dollars of investment (in many forms) have poured into Africa at an accelerating rate.

• Yesterday, for example, China offered Nigeria insurance cover of $40-50b to help fund investment in Africa's biggest oil producer.
  
• Private investments have also been pouring to develop not only oil and mineral resources but also telecom, infrastructure and financial assets.
  
• And Africa's trade with some nations is rising exponentially; the IMF reported last month: "Two-way trade flows between Africa and China have been growing rapidly. Between 2001 and 2006, Africa’s exports to and imports from China rose on average by more than 40 percent and 35 percent, respectively, significantly higher than the growth rate of world trade (14 percent) or commodities prices (18 percent)," which is a combined increase from $10b to $55b."
  
• Many African stock markets have soared in the past two or three years, attracting (and further driven by...
  
• Western hedge funds and African funds being launched and working hard to gain exposure. Brokerage businesses in Africa have also been improving,
  
• and we find several instances of Western-educated ex-pats from Africa returning to start companies, both non-financial and financial. Databank Group (an investment bank) in Ghana, founded by Ken Ofori Atta, is an example. Another is a fund being raised by Tutu Agyare, highlighted in an FT article this week.
  
• At the ground-level, we see many reports of Africans applying both new and basic science to agriculture in Africa, and seeing dramatic increases in productivity, versus incremental increases on already-developed Western farms.
• Solar power investments are also arising in Africa, thanks to the weather patterns and the rapid development of lower-cost solar technologies and production methods outside Africa. (Even on the most micro level: we've read of some Nigerian villagers.

Political instability, erratic policy, inflation, corruption, disease and history's gamut of challenges meet many African nations, although less-so after decades of gradual reform. And now the increasingly sophisticated, wealthy and resource-hungry Developing Markets (particularly China, Russia and India), as well as Western investors, are putting assets to work there, and indigenous enterprises are becoming much more prominent as well. Some of the developments would stun casual observers of Africa: Rwanda launched a stock market this year, in part to float the companies intended for privatization. Articles citations by RGE Monitor, and its own articles such as "Africa Growing at Unstoppable Momentum?" offer helpful overviews (located here).

Some Western investors, even those without employees in Africa, are getting a foothold. We read of several hedge funds making big country-bets, new hedge funds forming, and the occasional Western mutual funds finding pockets of liquidity as well. Retail investors will be able to gain only scant access for now, and not without a lot of work to gain reliable access and research to identify the opportunities. But things are slowly changing. The FT reported on the launch of the Duet Victoire Africa Index to track the largest stocks across sub-Saharan Africa outside of South Africa. Asset allocators will raise an eyebrow that correlation among the African stock exchanges is much lower than in Developed continents, according to the Index's originator. That's in addition to the low correlation that many African markets will have with non-African markets in the same asset class, as we mentioned in our post "Asset Allocation: New Paradigms."

Asset Allocation: New Paradigms

Finding our efficient portfolio frontier ("Asset Allocation Insights") -- and pushing it outward (with help from "Major Investment Trends") -- is our primary interest in this blog.

A book on the same subject is "Inside the House of Money," by analyst Steven Drobny whose clients are many of the best Global Macro fund managers. It's a fascinating study because it consists of detailed interviews with 13 money managers talking about their approaches and investments.

We'll offer a few quotes from "The Family Office Manager" chapter featuring Jim Leitner of Falcon Management. Leitner employs an endless diversity of investment vehicles that wouldn't be found in any "traditional" asset allocations, but his goal is to construct a higher-performing efficient asset allocation nonetheless. That's why we're interested. And he happens to be a self-made billionaire who is reported to have produced 30% compound annual returns since he founded Falcon in 1997 with proceeds from his successful Wall Street career.

Here are a few snippets from the Leitner chapter that speaks to the point of our post today -- New Paradigms in Asset Allocation and Investment Trends:

• [Drobny asks] If you allocate 6.5% to one strategy, does that mean you generally run about 15 independent strategies in your portfolio at all times?
  
• [Leitner responds] That's where we'd like to get to eventually.... We're trying to get there by learning from what the real money [i.e. long only] funds do so well. Again, just look at the endowments at Harvard and Yale as the prime examples of having done something really intelligent. They have