Andrew Pitt

Ian Goldin

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Steven C Wieting

Suzanne R Gyorgy

Betsy Bickar

Dominic Picarda

Citi Private Bank’s Art Advisory & Finance team guides clients through the art market, helping to create important private art collections that reflect each collector’s vision. We provide administration and management, consultation on wealth planning, and offer loans collateralized by artwork. Our advisors seek to help clients buy wisely, save money, and turn their collections into valuable assets. We have longstanding expertise in numerous fields, including modern and contemporary art, Chinese antiquities, and impressionist paintings. We can source acquisition and disposal opportunities, research provenance and authenticity, and give insights into the significance of potential additions in context of overall collections. Besides impartial artistic expertise, we bring financial perspective to the collecting process, including intelligence about market trends, cycles, and timing. Having pioneered the concept of using art as collateral forty years ago, we enable liquidity to be unlocked from collections. That liquidity can be used to buy further artwork or for other investments. We accept internationally marketable paintings, sculptures, drawings, and high-value photographs as collateral for loans. In most cases, a collection used as collateral can remain in the client’s home or office. Our in-house loan appraisals allow discretion and confidentiality to be maintained. As well as advising collectors and providing art loans, we offer a comprehensive art management service. We can arrange packing, shipping, installation, conservation and framing of artworks, as well as administration and accounting for collections. This includes managing art insurance policies and appraisals, coordinating loans of works to exhibitions, and negotiating vendor services. We manage significant art holdings for trusts and foundations, as well as for individuals and families. With the potential for technology to enhance the world of art over the coming years, we believe that art’s existing appeal to collectors and investors could increase further. We stand ready to help clients grow and realize value from their collections. In the report that follows, we look to a variety of experts who talk about changes in the art market, including Nanne Dekking from Artory Inc. on the use of technology such as blockchain and Anders Petterson from ArtTactic on how changing demographics are triggering different behaviors and motivations around philanthropy. We also hear from Michael Moses and Jianping Mei from artasaninvestment.com on the financial characteristics of individual artists and groups of artists based on their relative liquidity level, Steven Wieting, Global Chief Investment Strategist from Citi Private Bank on the performance of art and its characteristics in an investment portfolio, and Betsy Bickar from Citi Art Advisory & Finance on the evolution of the art market over the past 40 years.Authors: Suzanne R Gyorgy,Steven C Wieting,Betsy Bickar,Dominic Picarda, CFA,

Citi Private Bank&rsquo;s Art Advisory &amp; Finance team guides clients through the art market, helping to create important private art collections that reflect each collector&rsquo;s vision. We provide administration and management, consultation on wealth planning, and offer loans collateralized by artwork. Our advisors seek to help clients buy wisely, save money, and turn their collections into valuable assets. We have longstanding expertise in numerous fields, including modern and contemporary art, Chinese antiquities, and impressionist paintings. We can source acquisition and disposal opportunities, research provenance and authenticity, and give insights into the significance of potential additions in context of overall collections. Besides impartial artistic expertise, we bring financial perspective to the collecting process, including intelligence about market trends, cycles, and timing. Having pioneered the concept of using art as collateral forty years ago, we enable liquidity to be unlocked from collections. That liquidity can be used to buy further artwork or for other investments. We accept internationally marketable paintings, sculptures, drawings, and high-value photographs as collateral for loans. In most cases, a collection used as collateral can remain in the client&rsquo;s home or office. Our in-house loan appraisals allow discretion and confidentiality to be maintained. As well as advising collectors and providing art loans, we offer a comprehensive art management service. We can arrange packing, shipping, installation, conservation and framing of artworks, as well as administration and accounting for collections. This includes managing art insurance policies and appraisals, coordinating loans of works to exhibitions, and negotiating vendor services. We manage significant art holdings for trusts and foundations, as well as for individuals and families. With the potential for technology to enhance the world of art over the coming years, we believe that art&rsquo;s existing appeal to collectors and investors could increase further. We stand ready to help clients grow and realize value from their collections. In the report that follows, we look to a variety of experts who talk about changes in the art market, including Nanne Dekking from Artory Inc. on the use of technology such as blockchain and Anders Petterson from ArtTactic on how changing demographics are triggering different behaviors and motivations around philanthropy. We also hear from Michael Moses and Jianping Mei from artasaninvestment.com on the financial characteristics of individual artists and groups of artists based on their relative liquidity level, Steven Wieting, Global Chief Investment Strategist from Citi Private Bank on the performance of art and its characteristics in an investment portfolio, and Betsy Bickar from Citi Art Advisory &amp; Finance on the evolution of the art market over the past 40 years.Authors: Suzanne R Gyorgy,Steven C Wieting,Betsy Bickar,Dominic Picarda, CFA,

Drivers of Evolution

For generations, many of the world’s wealthiest individuals and families have collected art. These personal collections have brought them enjoyment as well as created social networks and special bonds with family, friends, scholars, and fellow collectors. Many collectors lend artworks from their collections to museum exhibitions for others to study and enjoy while adding to the prestige of the collection. Additionally, over recent decades, high quality works of art have increasingly gained recognition for their investment potential.

The Global Art Market

Dag Detter

Anthony Pettinari

Willem Buiter

Andrew Howell

Edward L Morse

Michael Bilerman

Stefan Fölster

Harvinder Sian

The idea rests on the observation that governments around the world have an estimated $75 trillion of dollars of public assets, ranging from corporations to forests, which are often badly managed and frequently not even accounted for on their balance sheets. Over recent decades, policy makers have focused almost solely on managing debt while largely ignoring the question of public wealth. Given that in most countries public wealth is larger than public debt, just managing it better could help to solve the debt problem while also providing the material for future economic growth. A higher return of just 1% on global public assets would add some $750 billion to public revenues. Poor management not only throws money down the drain, but also forecloses opportunities. As an example, the fracking revolution, which is making the U.S. self-sufficient in oil, has taken place almost entirely on private land. In this Citi GPS report and as a preview to their upcoming book, Dag Detter and Stefan Fölster present their thesis that the governance of public wealth is one of the crucial institutional building blocks that divides well-run countries from failed states. They argue that the polarized debate between privatizers and nationalizers has missed the point — what really matters is the quality of asset management, and the focus when it comes to public wealth should be on yield rather than ownership. They calculate that improvements in public wealth management could yield returns greater than the world’s combined investment in infrastructure such as transport, power, water and communications. They also note that improvements in public wealth management could help to win the war against corruption as assets are moved at an arm’s length from politicians. They thus address at a single stroke two of the great problems of our age: the shortage of infrastructure investment thanks to the overhang of the public debt and the halt in the advance of democracy thanks to the prevalence of poor government. Improving the quality of asset management starts with transparency. Back in 1983, Chief Economist Willem Buiter argued that governments needed to have a clearer picture of their total balance sheet and should construct a “comprehensive balance sheet” including all assets and liabilities of the state, including commercial and non-commercial assets as well as central bank assets. He notes that even partial success — and the recognition of what information is still missing and preventing the completion of the comprehensive balance sheet — can inform policy debate and improve the accountability of the state and its agents. Finally, the authors argue that the best way to foster good management and democracy is to consolidate public assets under a single institution — a national wealth fund — which is removed from direct government influence. This structure maximizes economic value consistent with the principles of corporate governance. It can also be a vehicle for improving access or the cost of borrowing on the international capital markets for financing infrastructure projects or other commercial ventures or assets. Authors: Dag Detter,Stefan Fölster,Willem Buiter,Michael Bilerman,Andrew Howell,Edward L Morse,Anthony Pettinari,Harvinder Sian,

The idea rests on the observation that governments around the world have an estimated $75 trillion of dollars of public assets, ranging from corporations to forests, which are often badly managed and frequently not even accounted for on their balance sheets. Over recent decades, policy makers have focused almost solely on managing debt while largely ignoring the question of public wealth. Given that in most countries public wealth is larger than public debt, just managing it better could help to solve the debt problem while also providing the material for future economic growth. A higher return of just 1% on global public assets would add some $750 billion to public revenues. Poor management not only throws money down the drain, but also forecloses opportunities. As an example, the fracking revolution, which is making the U.S. self-sufficient in oil, has taken place almost entirely on private land. In this Citi GPS report and as a preview to their upcoming book, Dag Detter and Stefan F&ouml;lster present their thesis that the governance of public wealth is one of the crucial institutional building blocks that divides well-run countries from failed states. They argue that the polarized debate between privatizers and nationalizers has missed the point &mdash; what really matters is the quality of asset management, and the focus when it comes to public wealth should be on yield rather than ownership. They calculate that improvements in public wealth management could yield returns greater than the world&rsquo;s combined investment in infrastructure such as transport, power, water and communications. They also note that improvements in public wealth management could help to win the war against corruption as assets are moved at an arm&rsquo;s length from politicians. They thus address at a single stroke two of the great problems of our age: the shortage of infrastructure investment thanks to the overhang of the public debt and the halt in the advance of democracy thanks to the prevalence of poor government. Improving the quality of asset management starts with transparency. Back in 1983, Chief Economist Willem Buiter argued that governments needed to have a clearer picture of their total balance sheet and should construct a &ldquo;comprehensive balance sheet&rdquo; including all assets and liabilities of the state, including commercial and non-commercial assets as well as central bank assets. He notes that even partial success &mdash; and the recognition of what information is still missing and preventing the completion of the comprehensive balance sheet &mdash; can inform policy debate and improve the accountability of the state and its agents. Finally, the authors argue that the best way to foster good management and democracy is to consolidate public assets under a single institution &mdash; a national wealth fund &mdash; which is removed from direct government influence. This structure maximizes economic value consistent with the principles of corporate governance. It can also be a vehicle for improving access or the cost of borrowing on the international capital markets for financing infrastructure projects or other commercial ventures or assets. Authors: Dag Detter,Stefan F&ouml;lster,Willem Buiter,Michael Bilerman,Andrew Howell,Edward L Morse,Anthony Pettinari,Harvinder Sian,

Unlocking the value of global public assets

In his foreword to the book The Public Wealth of Nations, Adrian Wooldridge, Management Editor of The Economist, suggests that Dag Detter and Stefan Fölster have proposed a new idea in the public policy arena which not only identifies a problem that few people had realized existed, but suggests a relatively pain-free way to tackle it while at the same time boosting the size of the global economy.

The Public Wealth of Nations

Ebrahim Rahbari

Benjamin Nabarro

Brian Nolan

Matteo Richiardi

Luis Valenzuela Rivera

However, within-country inequality in the larger developing countries — the same economies that have enjoyed large income growth and narrowed the differences with rich countries, such as China, India, and Indonesia — has actually increased substantially in recent years. As a result, income inequality within countries now accounts for around a third of global inequality, when it was only one-fifth in 1988. The contribution of inter-country inequality has correspondingly shrunk. Of critical focus to our research, income inequality has increased substantially within many OECD countries over recent decades after a long period of decline. The extent to which income inequality in advanced economies has grown is now widely known, though the relative importance of the range of driving forces producing these trends is less clear, as is their importance to economic growth. Rising inequality is not only a concern from a fairness perspective, in itself and in terms of its impacts on social outcomes such as health, crime, and family structures; it is also now increasingly being seen as a core issue for macroeconomic performance, implicated in the economic crisis and slow recovery from it, and as representing a major threat to long-term growth and prosperity. A range of factors has been identified contributing to the rise in income inequality across OECD countries, including technological change, globalization, changes in labor market institutions, and weakening redistribution via taxes and transfers, as well as specific factors affecting the very top of the income distribution and the distribution of wealth and income arising from this. There remain substantial differences across studies as to the relative contribution of particular elements. What is more surprising, perhaps, is that the search for effective responses is still at an early stage, although recently international organizations such as the OECD and IMF have advanced some broad recommendations to tackle inequality while promoting growth. Against this background, our research program will focus on identifying the impacts of inequality on economic growth potential, social cohesion, and the political process. On the back of this, we shall collaboratively suggest a coherent set of responses that would address rising inequality in a manner that promotes inclusive growth. The Executive Summary of this report summarizes our initial findings and conclusions. Three significant points are worth stressing here. First, it appears increasingly clear to us that if the drivers of inequality are not addressed, then inequality may become an increasing drag on economic growth due to a variety of factors which we assess throughout this report and which we shall investigate further in future research. The drag reflects wasted potential and a skills mismatch within labor forces and also that more unequal societies are less successful at investing productively for the long term. Indeed, we highlight that more unequal countries now seem to be growing less robustly than more equal ones, i.e., growth may be lower and more fragile at higher levels of economic inequality. From an investment perspective, an inequality-driven economic drag could take quite different paths in different countries leading to a consequent impact on longer-term relative asset prices and exchange rates. In other words, and put bluntly, it makes good economic sense to understand and address inequality. Second, economic inequalities are everywhere, which makes addressing the underlying issues with simple policy responses very challenging. We show in this report that inequalities have grown not just between countries but between regions within countries, between generations, between industries, and between firms. In particular, demographic forces, most notably the aging population in the developed markets, are creating a new set of inter-generational inequality challenges that are likely to get worse. Globally, wealth inequality is significantly higher than income inequality. Putting an inter-generational lens on this sharpens the issue. The debate around inequality thus needs to be related to issues such as youth unemployment, social mobility, and pension funding. Third, inequality, as well as the impact of other exacerbating factors such as lower social care budgets and the reduced provision of other government-funded services, is now clearly a critical focus in the mainstream political process and in election campaigns in many countries. In aggregate, it appears that inequality is contributing markedly to declining social trust, the erosion of social cohesion, and the fragmentation of the political process. Inequality will likely be an increasing factor in election outcomes, with social media playing a growing role in shaping perceptions. A consensus urgently needs to be reached between government, the public sector, the private sector, and society at large about how to tackle the challenge of inequality in a way that promotes inclusive and necessary economic growth. At the moment, we risk political paralysis, or worse. Authors: Brian Nolan,Ebrahim Rahbari,Matteo Richiardi,Luis Valenzuela Rivera,Benjamin Nabarro,Authors: Brian Nolan,Ebrahim Rahbari,Matteo Richiardi,Luis Valenzuela Rivera,Benjamin Nabarro,Authors: Authors: Brian Nolan,Ebrahim Rahbari,Matteo Richiardi,Luis Valenzuela Rivera,Benjamin Nabarro,Authors: Brian Nolan,Ebrahim Rahbari,Matteo Richiardi,Luis Valenzuela Rivera,Benjamin Nabarro,

However, within-country inequality in the larger developing countries &mdash; the same economies that have enjoyed large income growth and narrowed the differences with rich countries, such as China, India, and Indonesia &mdash; has actually increased substantially in recent years. As a result, income inequality within countries now accounts for around a third of global inequality, when it was only one-fifth in 1988. The contribution of inter-country inequality has correspondingly shrunk. Of critical focus to our research, income inequality has increased substantially within many OECD countries over recent decades after a long period of decline. The extent to which income inequality in advanced economies has grown is now widely known, though the relative importance of the range of driving forces producing these trends is less clear, as is their importance to economic growth. Rising inequality is not only a concern from a fairness perspective, in itself and in terms of its impacts on social outcomes such as health, crime, and family structures; it is also now increasingly being seen as a core issue for macroeconomic performance, implicated in the economic crisis and slow recovery from it, and as representing a major threat to long-term growth and prosperity. A range of factors has been identified contributing to the rise in income inequality across OECD countries, including technological change, globalization, changes in labor market institutions, and weakening redistribution via taxes and transfers, as well as specific factors affecting the very top of the income distribution and the distribution of wealth and income arising from this. There remain substantial differences across studies as to the relative contribution of particular elements. What is more surprising, perhaps, is that the search for effective responses is still at an early stage, although recently international organizations such as the OECD and IMF have advanced some broad recommendations to tackle inequality while promoting growth. Against this background, our research program will focus on identifying the impacts of inequality on economic growth potential, social cohesion, and the political process. On the back of this, we shall collaboratively suggest a coherent set of responses that would address rising inequality in a manner that promotes inclusive growth. The Executive Summary of this report summarizes our initial findings and conclusions. Three significant points are worth stressing here. First, it appears increasingly clear to us that if the drivers of inequality are not addressed, then inequality may become an increasing drag on economic growth due to a variety of factors which we assess throughout this report and which we shall investigate further in future research. The drag reflects wasted potential and a skills mismatch within labor forces and also that more unequal societies are less successful at investing productively for the long term. Indeed, we highlight that more unequal countries now seem to be growing less robustly than more equal ones, i.e., growth may be lower and more fragile at higher levels of economic inequality. From an investment perspective, an inequality-driven economic drag could take quite different paths in different countries leading to a consequent impact on longer-term relative asset prices and exchange rates. In other words, and put bluntly, it makes good economic sense to understand and address inequality. Second, economic inequalities are everywhere, which makes addressing the underlying issues with simple policy responses very challenging. We show in this report that inequalities have grown not just between countries but between regions within countries, between generations, between industries, and between firms. In particular, demographic forces, most notably the aging population in the developed markets, are creating a new set of inter-generational inequality challenges that are likely to get worse. Globally, wealth inequality is significantly higher than income inequality. Putting an inter-generational lens on this sharpens the issue. The debate around inequality thus needs to be related to issues such as youth unemployment, social mobility, and pension funding. Third, inequality, as well as the impact of other exacerbating factors such as lower social care budgets and the reduced provision of other government-funded services, is now clearly a critical focus in the mainstream political process and in election campaigns in many countries. In aggregate, it appears that inequality is contributing markedly to declining social trust, the erosion of social cohesion, and the fragmentation of the political process. Inequality will likely be an increasing factor in election outcomes, with social media playing a growing role in shaping perceptions. A consensus urgently needs to be reached between government, the public sector, the private sector, and society at large about how to tackle the challenge of inequality in a way that promotes inclusive and necessary economic growth. At the moment, we risk political paralysis, or worse. Authors: Brian Nolan,Ebrahim Rahbari,Matteo Richiardi,Luis Valenzuela Rivera,Benjamin Nabarro,Authors: Brian Nolan,Ebrahim Rahbari,Matteo Richiardi,Luis Valenzuela Rivera,Benjamin Nabarro,Authors: Authors: Brian Nolan,Ebrahim Rahbari,Matteo Richiardi,Luis Valenzuela Rivera,Benjamin Nabarro,Authors: Brian Nolan,Ebrahim Rahbari,Matteo Richiardi,Luis Valenzuela Rivera,Benjamin Nabarro,

Addressing a Growing Challenge

On average, income inequality within developing economies is very high, particularly in Africa, and higher than in the industrialized world, which creates its own major development challenges. But, in aggregate, global income inequality has declined from the late 1980s, and particularly rapidly from about 2008, as developing economies have, on average, closed some of the gap with industrialized countries. Previously, at least since the early 19th century, global inequality had increased. The driving factors behind this change have included the very real impact of globalization and technology on trade and employment, and also the transition of the formerly Communist bloc in Eastern Europe. In very simple terms, globalization has been a positive force in leveling inter-country inequality over the past 30 years. At the same time, the share of the world’s population estimated to be below the World Bank’s $1.90/day extreme poverty threshold has fallen drastically, from 35% in 1990 to 11% in 2013. Despite a major expansion in world population, the number of people in extreme poverty has fallen dramatically from 1.85 billion to under 800 million.

Inequality and Prosperity in the Industrialized World

Key Trends Shaping the Global Economy and Society Our world will change more this century than during any other time in human history. Change will happen faster than ever before. It will also affect more people than ever before. Globalization has linked us all together, with countries, companies and individuals connected as nodes in a global system of unprecedented complexity. Economic fortunes will rise and fall dramatically. Demographic shifts will transform geopolitics and growth prospects. Technology, education and income growth will drive innovation. All of these changes present extraordinary new opportunities but simultaneously new systemic risks that threaten the entire system. Good governance will mitigate those risks and create unparalleled opportunity. Bad governance will invite chaos and crises. Those who grasp the direction of the wind and harness its power will be separated from anyone stuck in outdated 20th century ways of understanding this new world. This report forecasts the winds of change—their direction, speed, and intensity. It provides, like most weather forecasts, cause for hope but also concern. Forecasts are not predictions. We nevertheless are confident about the key choices. The 21st century could hail an era of unprecedented opportunities for prosperity. It could also usher in opportunities for cataclysmic shocks, making the recent financial crisis a harbinger of more severe storms to come. The changes created by globalization, demographics, technology, economic growth, systemic risk, and governance will serve as a guide to 21st century businesses, investors, and governments. This report examines each of these key drivers of change. Authors: Ian Goldin,Andrew Pitt,Authors: Ian Goldin,Andrew Pitt,Authors: Ian Goldin,Andrew Pitt,

<h2>Key Trends Shaping the Global Economy and Society</h2> <h3>Our world will change more this century than during any other time in human history. Change will happen faster than ever before. It will also affect more people than ever before.</h3> Globalization has linked us all together, with countries, companies and individuals connected as nodes in a global system of unprecedented complexity. Economic fortunes will rise and fall dramatically. Demographic shifts will transform geopolitics and growth prospects. Technology, education and income growth will drive innovation. All of these changes present extraordinary new opportunities but simultaneously new systemic risks that threaten the entire system. Good governance will mitigate those risks and create unparalleled opportunity. Bad governance will invite chaos and crises. Those who grasp the direction of the wind and harness its power will be separated from anyone stuck in outdated 20th century ways of understanding this new world. This report forecasts the winds of change—their direction, speed, and intensity. It provides, like most weather forecasts, cause for hope but also concern. Forecasts are not predictions. We nevertheless are confident about the key choices. The 21st century could hail an era of unprecedented opportunities for prosperity. It could also usher in opportunities for cataclysmic shocks, making the recent financial crisis a harbinger of more severe storms to come. The changes created by globalization, demographics, technology, economic growth, systemic risk, and governance will serve as a guide to 21st century businesses, investors, and governments. This report examines each of these key drivers of change. Authors: Ian Goldin,Andrew Pitt,Authors: Ian Goldin,Andrew Pitt,Authors: Ian Goldin,Andrew Pitt,

Key Trends Shaping the Global Economy and Society

Future Opportunities, Future Shocks

But what if it’s not that simple? What if there have been structural changes to the investing environment which derail the shift between bonds and equities? Or what if there was never really a relationship between the performance of the two asset classes and it was all just a coincidence? In this new Citi GPS report, Mark Schofield and Citi’s macro team conclude that investors expecting a “great rotation” out of bonds and into equities as the economic cycle turns are likely to be disappointed. They’re not saying that there won’t be a significant flow out of cash into equities, as some investors reverse secular reductions in equity allocations going forward, but these are unlikely to be directly linked to bond selling. Instead of rotation, the major trend underway in asset allocation is diversification. Investors are not selling bonds to buy equities. Instead, they are diversifying out of traditional assets into a range of new assets and asset managers are creating platforms that make it easier for them to do this. There is a growing tendency for regional economic variances to drive capital allocation decisions, with asset class choice becoming a secondary consideration. On the supply side, a much broader set of available assets has evolved, with markets in real estate, commodities and foreign exchange emerging as asset classes in their own right. In addition, the huge growth in alternative asset platforms, including exchange traded funds and hedge funds, has also increased the demand for alternative assets. Finally, changes in the regulatory environment have historically had a meaningful impact on asset allocation flows and this impact will likely continue into the future. If we’re not going to see a great rush back into equities, does this mean the equity cult is dead? Not necessarily. There is still likely to be continued inflows into equities due to relative valuation, the search for yield/ financial repression, improving risk-adjusted returns, upside optionality and reduced systemic risk, but not necessarily a “great rotation” into equities as bonds won’t see anticipated outflows until investors have a reason to sell them. That won’t happen until we see higher funding costs, higher volatility, or a real inflation threat. In the meantime, both the equity cult and the bond cult can live side by side.

But what if it&rsquo;s not that simple? What if there have been structural changes to the investing environment which derail the shift between bonds and equities? Or what if there was never really a relationship between the performance of the two asset classes and it was all just a coincidence? In this new Citi GPS report, Mark Schofield and Citi&rsquo;s macro team conclude that investors expecting a &ldquo;great rotation&rdquo; out of bonds and into equities as the economic cycle turns are likely to be disappointed. 
They&rsquo;re not saying that there won&rsquo;t be a significant flow out of cash into equities, as some investors reverse secular reductions in equity allocations going forward, but these are unlikely to be directly linked to bond selling. Instead of rotation, the major trend underway in asset allocation is diversification. Investors are not selling bonds to buy equities. Instead, they are diversifying out of traditional assets into a range of new assets and asset managers are creating platforms that make it easier for them to do this. There is a growing tendency for regional economic variances to drive capital allocation decisions, with asset class choice becoming a secondary consideration. On the supply side, a much broader set of available assets has evolved, with markets in real estate, commodities and foreign exchange emerging as asset classes in their own right. In addition, the huge growth in alternative asset platforms, including exchange traded funds and hedge funds, has also increased the demand for alternative assets. Finally, changes in the regulatory environment have historically had a meaningful impact on asset allocation flows and this impact will likely continue into the future.
If we&rsquo;re not going to see a great rush back into equities, does this mean the equity cult is dead? Not necessarily. There is still likely to be continued inflows into equities due to relative valuation, the search for yield/ financial repression, improving risk-adjusted returns, upside optionality and reduced systemic risk, but not necessarily a &ldquo;great rotation&rdquo; into equities as bonds won&rsquo;t see anticipated outflows until investors have a reason to sell them. That won&rsquo;t happen until we see higher funding costs, higher volatility, or a real inflation threat. In the meantime, both the equity cult and the bond cult can live side by side.

Diversification, Not Rotation, is the New Watchword

Modern portfolio theory leads us to believe that asset management is easy: when yields start to fall in one asset class investors should just shift into a higher-yielding asset and by carefully shifting the proportion of these assets in a portfolio, risk will be minimized. It follows then that all of the money which transferred into bonds since the great financial crisis began will shift back to equities once interest rates start to rise again. Given where we are today in the economic cycle, the theoretical call to action should be “All aboard the equity express train!”

Asset Allocation for a New Era

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