IMF: Short-Term Surges in Capital Can Prompt Policy Changes

In a staff position paper “Capital Inflows: The Role of Controls,” issued in February, IMF staff discusses the circumstances under which controls on capital inflows to emerging market economies can usefully form part of the policy toolkit to address the economic or financial concerns surrounding sudden surges in capital.

According to the IMF staff, there are a number of policy choices governments can make when faced with a short-term or sudden surge in foreign capital. These include: allowing the currency to appreciate; accumulating more reserves; changing fiscal and monetary policy; strengthening rules to prevent excessive risk in the financial system; and capital controls.

In some circumstances, capital controls may complement the use of economic or prudential remedies to more effectively address the problem. To read the IMF staff paper, visit imf.org.

Survey: DB Pension Plans May Likely Disappear from the U.K.

The recent financial crisis has accelerated the demise of defined benefit (DB) pension schemes, so much so that U.K. companies predict that DB schemes will cease to exist within the next decade, according to the survey and report “The Future of Corporate Pensions,” from the Economist Intelligence Unit and Buck Consultants.

Asked about the biggest challenges their firms will face this year in managing their pension schemes, the 251 executives surveyed for the study point to increasing deficits, possible regulatory intervention and uncertainty over future interest rates. Of those U.K. companies surveyed, 20% still offer a DB pension scheme that is open to new employees, but three-quarters predict that these schemes will no longer exist by 2019. For more on this report, visit eiu.com.

Risk Parity Approach Gaining Traction, Despite Flaws

Suggestions that large institutional investors adopt a risk parity approach has been an increasing trend at the policy portfolio level, states a February Callan Investments Institute Research report, “The Risk Parity Approach to Asset Allocation.” This approach already is common among asset management firms managing diversified global multi-asset class portfolios.

Despite this trend, the report argues that in the absence of leverage, the expected return of a risk parity portfolio employing standard asset classes is too low to be compelling for most institutional investors.

According to the report, by combining leverage with a risk parity portfolio, an investor can theoretically achieve their required rate of return (typically between 8.0% and 8.5%) with a lower level of risk than can be achieved with an unlevered portfolio along the Efficient Frontier. But in spite of its intuitive appeal, the risk parity portfolio is not the risk-minimizing portfolio. It lies below the Efficient Frontier, meaning there are other portfolios on the Frontier which, when combined with leverage, can achieve the same expected return as the levered risk parity portfolio at an even lower level of risk.

For more on this report, visit callan.com.

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