Myth busters: Part 1 · 4 Myth busters: Part 1 By: Michael Thomas, CFA, Chief Investment...

INVESTED. TOGETHER.™

Myth busters: Part 1

8 Adapting responsibly to markets: How to do it, and what it takes to be successful 11 Four ways positioning strategies can benefit investors 13 Portfolio success for the 2015 fiscal year

THIRD QUARTER 2014

ALSO IN THIS ISSUE:

Russell Investments // Russell Communiqué p / 2

EXECUTIVE VIEW

3 What does “positioning” mean to you? By: Kevin Turner, CFA, Managing Director, Consulting

INVESTMENT FOCUS

4 Myth busters: Part 1 By: Michael Thomas, CFA, Chief Investment Officer—Americas Institutional

Most of us like to think of ourselves as rational, thoughtful human beings—not swayed by financial headlines or investment hearsay. Yet investment myths persist. In this first part of our series, CIO Michael Thomas dispels two key myths impacting investors.

CLIENT FOCUS

8 Adapting responsibly to markets: How to do it, and what it takes to be successful

By: Rob Balkema, CFA, Portfolio Manager, and Mike Ruff, CFA, Director & Senior Portfolio Manager, Multi-Asset Solutions

As investors seek to manage risks and find returns, portfolio managers are looking for ways to adapt responsibly to the markets. In this article, learn more about dynamic portfolio management, its potential benefits and the elements contributing to successful outcomes.

OPINION

11 Four ways positioning strategies can benefit investors By: James Barber, CFA, Chief Investment Officer, Equities

Positioning strategies allow investors to precisely manage exposures to specific global market segments, factors or concepts within their portfolios. In this piece, James Barber outlines four ways they can benefit investors.

Q&A

13 Portfolio success for the 2015 fiscal year With: Heather Myers, Managing Director, Non-profits

In this interview, Heather Myers discusses key considerations for non-profit organizations as they begin the 2015 fiscal year.

GREAT MOMENTS IN FINANCIAL HISTORY

14 Kids are always looking for shortcuts… By: Leola Ross, Ph.D., CFA, Director, Capital Markets Research

RESEARCH FOCUS

15 Russell Research

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Kevin Turner

Dear Readers,

Now that the 2014 FIFA World Cup in Brazil has concluded, everyone is turning their attention back to equity market risks, interest rate gyrations and geopolitical conflicts.

That said, before our memories fade, I did want to reflect on one aspect of these soccer matches that resonated with me – and that was the clarity of purpose displayed game after game. These soccer teams just wanted to win. Most teams did not care about the margin of victory, they simply wanted to move on to the next round. The positioning of players constantly evolved in response to conditions on the field. Teams that were ahead became more defensive. Teams that fell behind pushed forward in attack. Tactical substitutions were made. They knew what the goal was and were not afraid to make adjustments based on the score on the board.

Of course, there are analogies to investing. In this issue of Russell Communiqué, our contributing authors explore various aspects of “positioning” with respect to institutional investors’ portfolios. First, Mike Thomas dispels several investment myths in our lead article, highlighting the importance of positioning your governance structure to mitigate common beliefs that may influence decision-making. Next, Rob Balkema and Mike Ruff share portfolio management insights regarding responsibly adapting portfolios based on market conditions. In our Opinion article, James Barber talks about the concept of positioning strategies that allow investors to precisely manage exposures to specific global market segments, factors or concepts within their portfolios. And in our Q&A, Heather Myers addresses non-profit organizations aiming to position their investments for success in a new fiscal year.

Positioning is becoming an increasingly important concept in the evolution of institutional investing. What do you think? Let’s constantly put our best foot forward. Securing promised pension benefits, achieving individual retirement income needs, and providing continued support to our non-profit missions is just too important. We don’t want success to come down to penalty shoot-outs.

Thank you for reading,

Kevin Turner,

CFA, Managing Director, Consulting

EXECUTIVE VIEW

What does “positioning” mean to you? By: Kevin Turner, CFA, Managing Director, Consulting


INVESTMENT FOCUS

At our annual conference this past spring, I presented on some common misconceptions (a.k.a. myths) in the investment industry that may be harmful to us as investors. That presentation led to some great discussions during the breaks around the sessions at the conference, and we decided to summarize the myths in a series of articles here in Russell Communiqué for those who were not able to attend.1 For those who were with us in Dana Point, we will add a new myth to each article just to keep things interesting.

STRATEGY TIMING IMPLEMENTATION

SOME BACKGROUND FROM THE WORLD OF BEHAVIORAL FINANCE

Most of us like to think of ourselves as rational, thoughtful human beings—not swayed by financial headlines or investment hearsay. We take comfort in thinking that our beliefs about the markets, and investing in general, are grounded in and supported by cold, hard facts and sound logic. But in reality, the professional investor may be just as susceptible as anyone else to believing things that simply are not true.

This isn’t a condemnation of the professionals in our industry, many of whom have spent decades studying the markets. Rather, it is an acknowledgment of how our brains actually work. Psychologist Daniel Kahneman, who shared the Nobel Memorial Prize in Economic Sciences in 2002, addresses this in his “Thinking Fast and Slow.” Kahneman observes that humans have two modes of thinking. Type 1 thinking is fairly automatic—drawing conclusions quickly, and often basing them on a sliver of truth, without much effort. Type 2 thinking is what Kahneman describes as “effortful,” which obviously involves the effort lacking in Type 1 thinking.

As much as we would like to believe (or hope!) that most of the decisions we make are based on Type 2 thinking, it is actually Type 1 thinking that dominates. That’s why myths, including investment myths, exist and persist.

Now that we are aware of these potential biases in our thinking, let’s put a few investment myths to the test.

MYTH: HIGH RETURNS ARE FOLLOWED BY LOW RETURNS

In 2013, the Russell 3000® Index was up by almost 34%—a fantastic year by all accounts. That positive news, however, was quickly followed by headlines suggesting that investors should lower their expectations for 2014, and that returns going forward should naturally be below long-term averages to account for the above-average

Myth busters: Part 1By: Michael Thomas, CFA, Chief Investment Officer—Americas Institutional

Michael Thomas

1 The video of the original presentation can be found at: https://www.youtube.com/watch?v=wIAGE2QH0Lk

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returns in 2013. As shown below, there is little empirical evidence nor a strong investment case as to why this argument should hold true.

However, before getting to that, it’s worthwhile to explore why you should care whether the assertion that high returns are naturally followed by low returns is true or not. At the moment, we’re seeing fairly significant cash flows across our client base. Corporations, for example, are making large contributions to their pension plans, and there are cash outflows associated with lump sum payments to terminated vested employees; both situations require investors to make decisions about where these cash flows will go to or come from.

Now let’s turn to the empirical data. To test whether there is reversion in terms of returns, we can plot the return for one period versus the return for the subsequent period. If the markets were perfectly mean-reverting (i.e., if good years were followed by equally bad years), then we would have expected to get a line

something like the one in Exhibit 1 below—one with a 45-degree angle, correlation of -1.0 or an R2 of 1.0.2 Thus, we carefully scrutinized U.S. equities3 performance data from 1902–2013 to see if this high/low return pattern existed. We started by plotting the return in every year against the return in the next year. And what we would have expected is not what we got. Interestingly, it is not what we actually experienced at all. As shown in Exhibit 2, we find essentially no correlation of returns between one calendar year versus the next over more than 100 years of equity market experience. The result didn’t change when we compared returns of two consecutive years with those of the next two years, or returns of three consecutive years with those of the next three years.

How about the investment logic? At the most basic level, equity market performance is broadly linked to economic growth prospects, and this is a function of population and productivity growth—neither of which are inherently mean-reverting.

Exhibits 1 and 2: No correlations in U.S. equity market returns over 1, 2 or 3 consecutive years (1902–2013)

Source: S&P 500 Indexes are unmanaged and cannot be invested in directly. Past performance is not indicative of future results.

2 In reality, the line in Exhibit 1 would be shifted upward and to the right to account for the positive central tendency of equity returns over time, as opposed to the zero average return shown.

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INVESTMENT FOCUS (continued)

This leaves us with a very interesting conundrum. How is it that the seemingly sound case for reversion of returns has little empirical or logical support?

Remember that Type 1 thinking dominates and automatically short-circuits the Type 2 thinking that is required to really test the validity of the assertion that high returns are naturally followed by low returns. Likelier than not, many market observers have automatically assumed that mean reversion applies everywhere—when, in fact, a deeper dive reveals that mean reversion does not apply to equity market returns.

MYTH: MARKET VOLATILITY IS HIGH AT PRESENT

Since the global financial crisis, it has become common to describe fluctuation in equity markets as “volatility.” Increasingly you see assertions in the

popular press that the “equity markets have been quite volatile” lately. This is simply not accurate.

The problem with mischaracterizing current market conditions as being “highly volatile” is that investors can be lulled into complacency. Distortions in the assessment of our true risk tolerance can lead to holding a portfolio that will be too risky when we really do experience a volatile market. The portfolio risks you are comfortable with in today’s environment will not necessarily be tolerable in a truly volatile environment.

The most common quantitative measure of expected equity market volatility is the VIX index,4 which is shown in Exhibit 3 below.

As of June 30, 2014, the VIX stood at 11.6—which is around the seventh percentile of all data points over that time

The sliver of truth with this myth is that there may be reversion in some measures—valuations, for example—but the evidence for reversion based simply on equity market returns is weak.

Exhibit 3: VIX

4 The VIX—the Chicago Board Options Exchange Market Volatility Index—is a measure of the market volatility that is implied by the price of 30-day options to buy or sell the S&P 500 Index.

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period. In other words, expected volatility has been higher than it is today in more than 90% of the days over the last 10 years! The current VIX level ranks in the 5th percentile if we consider the entire history of the VIX index.

But the VIX is a forward-looking measure. What if we examine realized volatility? When we do, we reach the same conclusion. As shown in Exhibit 4, the annualized volatility of the Russell 1000® Index is quite low by historical standards.

The annualized volatility of daily returns has averaged just 10.8% year-to-date compared with 20.4% for the 10 years ended June 30, 2014, and 18.0% over the prior 10 years (in case you were wondering about the impact 2008–2009 had on the numbers). The bottom line is that neither expected nor realized historic volatility supports the assertion that today’s markets are volatile.

So why do we so regularly hear claims of high volatility? Part of the explanation may

be that gains and losses in popular market indexes are still quoted in points rather than in percentages, and that while the daily changes in the values of these indexes are larger than ever, in percentage terms they are quite small. This represents another example of Type 1 versus Type 2 thinking. Secondly, the events of 2008–2009 cast a long shadow, and many investors remain wary about an increase in volatility at some point in the future. But that is different from what is happening in the markets today. At some point in the future, volatility will return. When that will happen is hard to predict, but what we can say with some certainty is that when volatility does return, it will likely feel nothing like today’s market fluctuations.

We will explore other myths over the next few issues of Communiqué. In the meantime, if you hear others that you think need busting, please send them our way and we’ll try to address them in future issues.

The sliver of truth with this myth is that there is uncertainty regarding macroeconomic and political policy issues, which could lead to an increase in volatility at some point in the future. But the reality is that for the last several quarters, we have been enjoying a period of historically low volatility.

Exhibit 4: Russell 1000® Index rolling 30-day volatility (annualized):

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CLIENT FOCUS

Adapting responsibly to markets: How to do it, and what it takes to be successful By: Rob Balkema, CFA, Portfolio Manager and Mike Ruff, CFA, Director & Senior Portfolio Manager, Multi-Asset Solutions

Rob Balkema

While each investor is unique, all of our clients seek to solve core economic problems—and generate their required rate of return at a level of risk they can commit to. Unfortunately, investors want more certainty than they can afford and often need to take on more risk than desired in order to achieve that return. This is the fundamental tension in the risk/return trade-off.

While creating a strategic design and constructing the portfolio are requirements for success, they are not sufficient to meeting our clients’ objectives alone. Markets change, managers change and investor circumstances change. In order to provide the required rates of return at risk levels investors can commit to, we responsibly adapt our portfolios and encourage clients who are managing their own portfolios to do so as well. This ongoing dynamic portfolio management is the “manage” phase of our process.

MANAGING PORTFOLIOS DYNAMICALLY IS CRUCIAL IN THE CURRENT MARKET ENVIRONMENT

Dynamically managing portfolios is first and foremost about seeking to ensure that risks in the portfolio are worth taking, and secondarily about capturing opportunities for excess return when markets present them.

The global financial crisis taught investors that small, unintended risks can have large, adverse impacts on portfolios. Most investors felt the heightened levels of volatility and market dispersion, as compared to conditions in periods leading up to 2008. Risk management is crucial in today’s environment, to ensure that portfolios stay on track toward desired outcomes.

When actively managing portfolios, we use the mantra “First, do no harm.” That is to say: Focus on managing risk; then attempt to capture additional return only when opportunities to do so are quite compelling.

For Russell, this is not a rapidly changing global tactical asset allocation (GTAA) process, but rather an evolution in positioning through time. However, volatility in markets does create opportunities. For instance, in 2013, the Russell 1000® Index returned an astounding 33.1%; while the Dow Jones–UBS Commodity Index returned a negative 9.5%. We expect to see such dispersion less than 0.5% of the time. In 2013, the dispersion may have allowed for significant return enhancement via tilting in one direction and away from the other.


Mike Ruff

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Managing portfolios actively can help keep portfolios on track toward meeting investors’ objectives in a time when many risks are lying in the wait and additional return is needed.

With low bond yields and correspondingly low projected market returns, additional sources of return need to be identified and accessed. Managing portfolios dynamically can help keep portfolios on track toward meeting investors’ objectives in a time when many risks are lying in the wait and additional return is needed.

WHAT IT TAKES TO BE DYNAMIC

To be dynamic, we believe investors need to do three things that on the surface seem simple, but are quite difficult in practice:

› Know what you own, › Know where you want to be, and › Know how to get there.

Where is your total portfolio positioned today? While this seems like a simple question, for most investors, the amount of data and systems involved in managing multi-asset portfolios is daunting. The key to transparency is access—to daily holdings, exposures and risks. Russell’s research analysts and portfolio managers have access to valuable industry tools like FactSet, Axioma, RiskMetrics, Bloomberg and Wilshire. However, the marketplace does not offer ready-made tools for multi-asset portfolios. This has led Russell to build proprietary tools that allow our portfolio managers to analyze underlying strategies using three key lenses—performance, risk and fundamentals.

For instance, what is the current sensitivity of the total portfolio to rising interest rates? How would the portfolio perform if a credit crunch occurred again? What if we were to experience a repeat of the 2008 market crash? Knowing what you own is all about understanding the actual positions in the portfolio, rather than focusing on asset classes or managers’ capital allocations, which can be misleading. For instance, managers hold cash, U.S. equity managers hold international stocks, and high-yield bond managers hold loans. Understanding positioning and risks goes beyond understanding “what it says on the tin.”

Knowing where you want to be requires taking forward-looking views about how the economy and the markets will evolve. For Russell, this means gathering input from managers, external publications and economists. We also rely on our research teams and, importantly, the quantitative and qualitative views of our internal strategy team.

One of the most frustrating challenges for us as portfolio managers is in gaining a view, getting it right, and then not having the ability to express that view in the portfolio. Proper tools to move the portfolio in line with the portfolio manager’s views are essential for success. In the traditional model, the portfolio manager used manager changes and manager weight changes as the primary mechanisms to alter a portfolio. But precision matters, so Russell’s portfolio managers, working with our integrated implementation portfolio managers, are also able to utilize positioning strategies directly invested by Russell. The sheer breadth and depth of our integrated implementation function, including trading, transition management, currency management, smart beta strategies and exposure management strategies, make it possible for the portfolio manager to supplement or adjust their existing allocations quickly and precisely. These three levers—manager changes, manager weight changes and positioning strategies—allow portfolio managers to know how to get the portfolio aligned with preferred positioning.

EXAMPLE: IMPLEMENTING AN OVERWEIGHT TO JAPANESE EQUITIES AND AN UNDERWEIGHT TO THE YEN

One recent example of accessing opportunities by use of dynamic strategies occurred in Japan. In this instance, managing the portfolio was about understanding global equity manager positioning, seeing a structural change in the marketplace and having the levers required to move the portfolio in alignment with preferred positioning.


CLIENT FOCUS (continued)

Exhibit 1: Returns of Japanese equity and currency

By mid-2012, Japanese equities had fallen by more than 50% over a 20-year stretch (as shown in Exhibit 1). Global equity managers in portfolios had shunned Japanese companies for a decade, citing the low return on equity in the region and corporate management actions that did not favor shareholders. This meant that multi-asset portfolios were underweight the country by over 2%.

As Shinzo Abe, Japan’s prime minister, took office and began implementing economic reforms, the data and analysis provided by Russell’s strategist team helped us identify positive structural changes coming to the market. With our connections and local team in Japan, Russell also had the benefit of direct knowledge of local sentiment, the government’s conviction to act, and its ability to follow through on the reforms. The Japanese central bank would implement policies to support domestic equities at the expense of the Japanese currency, the yen. So “where we wanted to be” was overweight Japanese equities and underweight the yen—but the portfolio was positioned underweight Japan.

Working with our implementation team, portfolio managers were able to utilize equity futures in the short term to move the portfolio to an overweight Japan position while maintaining an underweight to the yen. Over the next few

weeks, working with the local manager-research team, in Tokyo, we were able to add a local all-cap Japanese equity manager to also get strong stock selection in the region. The results were that we could make a confident bet to overweight Japanese equity actively, via a high-conviction manager, and underweight the yen—in the end, creating a 27 basis points improvement in performance at the fund level from trough to peak.

HOW TO BE DYNAMIC WITH RUSSELL

Dynamic strategies may be appealing in the current environment, when return assumptions are low, yet return requirements remain high for many organizations. However, we believe effective dynamic strategies require daily monitoring and active risk management across asset classes.

For many organizations, those tasks could be challenging, given internal resources constraints and competing priorities. In some cases, it may be practical to work with a strategic provider—for investment outsourcing, implementation and/or advice. Dynamic strategies may offer some compelling benefits, but to meet the challenges of today’s investment environment, it’s important for the strategies to be tailored to your specific challenges and key objectives.

JPYUSD—Japanese yen and U.S. dollar cross. Indexes are unmanaged and cannot be invested in directly. Past performance is not indication of future results.

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OPINION


Four ways positioning strategies can benefit investors By: James Barber, CFA, Chief Investment Officer—Equities

“Smart beta” has generated quite a bit of industry buzz lately, but the term itself can be confusing—a broadly defined concept, it means different things to different people.“Positioning strategies” is a more specific term we have adopted to describe any investment strategy or instrument used to align a total portfolio with a portfolio manager’s preferences.

Used in conjunction with third-party active managers, positioning strategies allow portfolio managers to seek excess return and manage portfolio risks by giving them the ability to fully reflect strategic and dynamic insights with integrated liquidity and risk management. The tools used to implement positioning strategies include a broad set of investment capabilities such as overlays, index replication, smart beta strategies, ETFs and custom quantitative strategies.

To us, positioning strategies allow investors to precisely manage exposures to specific global market segments, factors or concepts within their portfolios. In this piece, I’d like to outline four ways positioning strategies can benefit investors:

1. Positioning strategies can help investors capture strategic beliefs.Most investors hold long-term investment views that drive the design of their portfolios. Positioning strategies can enhance those positions and help capture the desired return sources.

For example, active managers are typically structurally biased toward investments in more volatile stocks, but a PM or asset owner may want to build a portfolio that is less volatile than the market, in light of his/her beliefs or objectives. Therefore, to achieve the desired total-portfolio outcome, the PM may include positioning strategies that have defensive or lower volatility characteristics.

2. Positioning strategies can help investors capture dynamic positions.Changes to key market exposures (betas) can be dynamically managed over time via positioning strategies. This is a useful application if a portfolio’s exposure to a specific currency, country, factor or industry becomes significantly larger (or smaller) than its benchmark or a portfolio manager’s tactical views. For example, a PM wanting to neutralize exposure to the Japanese yen can use a positioning strategy that shorts the yen, while retaining the potential benefits of the active stock selection by the portfolio’s underlying managers.

James Barber


OPINION (continued)

I believe positioning strategies merit consideration from institutional investors as flexible, efficient and effective tools for portfolio managers to implement their strategic views, their dynamic views and effective risk and liquidity management.

3. Positioning strategies can be used to manage portfolio risks.In the Japanese yen example I provided above, positioning strategies were used not only to capture a dynamic position, but to also manage currency risks. Customized positioning strategies give portfolio managers and investors opportunities to manage risks at the portfolio level. When underlying managers or strategies are combined in a portfolio, risks are sometimes introduced or amplified in ways that don’t align with the portfolio manager’s views. Precisely managing exposures through the use of positioning strategies can help with more holistic risk management.

4. Positioning strategies can help investors manage liquidity.As cash flows in and out of portfolios, positioning strategies can be used as efficient and cost-effective ways to manage capital. Investors can gain targeted exposure to specific markets without the higher transaction costs associated with buying and selling physical stocks and bonds.

Investment strategies all come with unique risks, but I believe positioning strategies merit consideration from institutional investors as flexible, efficient and effective tools for portfolio managers to implement their strategic views, their dynamic views and effective risk and liquidity management.

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Q&A

As many institutions start a new fiscal year, Heather Myers discusses two ways non-profit organizations can help ensure success: dynamic portfolio management and investing in diversified return sources—i.e., risk premia.

What are some pressing issues non-profits are now facing?

Non-profit institutions need to grow portfolios in perpetuity while spending an average of 4% to 5% annually. Yes, this amount varies depending on the type of institution, as well as on the demands on the portfolio. How much does the institution rely on the portfolio for daily operations? For instance, several smaller liberal arts colleges at a recent industry conference I attended, shared that their portfolios provide 20%-plus per annum of the colleges’ operating budgets! They need to do all they can to grow the portfolio for the sake of the enterprise.

How could a more dynamic approach help?

Dynamic portfolio management means not only including actively managed strategies in the portfolio, but also actively tilting it and managing targeted exposures on the basis of both short- and long-term views.

A roles-based framework enables evaluation of investment components on how they contribute to critical outcomes of the overall investment strategy, and is a key component of the process. For non-profit organizations, assets play three specific roles—growth, return enhancement and risk reduction/diversification.

Can you tell our readers more about the roles-based framework?

The roles-based framework helps enable comparison of different risk premia across strategies that may serve in similar capacities. For instance, we identify a variety of strategies as being risk-reducing/diversifying, and this process affords an easier way to dynamically manage between, say, absolute return fixed income strategies and relative-value hedge fund strategies. Both are diversifying, but they could behave differently in rising interest rate environments, which we expect to be facing in the not too distant future.

What are some key take-aways?

Managing a non-profit organization’s portfolio is a challenging endeavor. The only way to meet a certain return target is to look globally and to access variety of risk premia, such as equity risk, credit risk, illiquidity risk and interest rate risk. The next year will require more of the same—dynamically managing portfolios to access a broad range of risk premia and incorporate robust risk-management processes.

Portfolio success for the 2015 fiscal yearWith: Heather Myers, Managing Director, Non-Profits

Heather Myers


GREAT MOMENTS IN FINANCIAL HISTORY

As the Revolutionary War was winding down in America, a young German boy was beginning a lifetime journey that would lead to the development of many tools we take for granted in financial markets today. Carl Friedrich Gauss was a pauper who started correcting his father’s payroll calculations at age 3 and attending a mathematics class at age 10. One day his teacher handed him an assignment to keep him busy. “Add up all the numbers from 1 to 100 and tell me the answer…” The young mathematician responded in just a few minutes with a shortcut: 50 x 101 = 5,050. It seems that this finite series of numbers has a pattern: 1 + 100 = 2 + 99 = 3 + 98… = 101, and that there are 50 such combinations. Gauss went on to publish convergence theories for infinite series—from finite to infinite—in the year 1812. The use of finite and infinite series is the basis for many of the things we do today, from calculating mortgage and other loan payments, to discounting cash flows, to pricing financial instruments.

Gauss developed many other shortcuts that are the basis for a number of financial analyses—e.g., the bell curve and the calculation of the normal distribution, along with the important concept of independent sampling; the study of “errors” leading to least squares and ultimately to conditional expectations, CAPM beta and Jensen’s alpha; and quadratic functions that give us risk-adjusted return analyses. Modern financial analysis would not be possible without these shortcuts that let us generalize, simplify and ascertain useful information from data.

Napoleon Bonaparte considered Gauss the greatest mathematician of all time and spared Gauss’s town while marching across Germany in 1807. Today, statistical techniques, physical laws and even a popular software package bear his name. So the next time you hear about a Gaussian process, distribution or elimination, your eyes may begin to glaze over…but just remember that it is really just about a young boy looking for a shortcut.

Kids are always looking for shortcuts…By: Leola Ross, Ph.D., CFA, Director, Capital Markets Research

Sources:

Bernstein, Peter L. (1996). Against the Gods: The Remarkable Story of Risk, John Wiley & Sons.

Falbo, Clement (January 1994). Math Odyssey 2000: Puzzles, Mysteries, Unsolved Problems, Breakthroughs, and the People of Mathematics, Stipe Publishing Co.

Roeder, Fred (January 1993). “Carl Friedrich Gauss and the German 10 Mark,” Backsights, Surveyors Historical Society. Online at http://www.surveyhistory.org/carl_friedric.htm (accessed July 21, 2014).

Leola Ross

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Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional.These views are subject to change at any time based upon market or other conditions and are current as of the date at the beginning of the document. Where noted, the opinions expressed in this material are not necessarily those held by Russell Investment Group, its affiliates or subsidiaries. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual or entity.Please remember that all investments carry some level of risk, including the potential loss of principal invested. Although steps can be taken to help reduce risk, it cannot be completely removed. Investments typically do not grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns. Diversification does not assure a profit and does not protect against loss in declining markets.Indexes are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. The trademarks, service marks and copyrights related to the Russell indexes and other materials as noted are the property of their respective owners.Copyright © Russell Investments 2014. All rights reserved. This material is proprietary and may not be reproduced, transferred or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.Russell Investment Group is a Washington USA corporation which operates through subsidiaries worldwide, including Russell Investments, and is a subsidiary of The Northwestern Mutual Life Insurance Company. The Russell logo is a trademark and service mark of Russell Investments. Date of first use: July 2014

RESEARCH FOCUS

Russell ResearchA SAMPLE OF RECENT RUSSELL RESEARCH PUBLICATIONS:› “Strategy Spotlight: Solutions for adjusting real estate exposure” by Regan Banst and

Brian Causey› “Strategy Spotlight: Equity index futures vs. total return swaps” by Regan Banst and Brian

Causey› “Strategy Spotlight: Exposure benchmarking” by Brian Causey and John Hanley› “LDI for cash balance plans” by Justin Owens

FOR NON-PROFIT ORGANIZATIONS:› “Absolute return fixed income strategies for non-profit investment portfolios” by Lila Han,

Mike Ruff, and Keith Brakebill› “Governance process for evaluating sustainable investing: A guide for non-profit

fiduciaries” by Heather Myers and Manisha Kathuria

FOR DC PLANS:› “Defined Contribution Retirement Plan Handbook” by Kevin Knowles, Michelle Rappa and

Mark Teborek› “Update: Russell ARA – Aiming for the bull’s eye” by Josh Cohen and Jeff Eng› “New research findings evolve our target date series methodology” by Josh Cohen› “A fresh look at the 5 key findings that impact Russell’s target date fund glide path design”

by Dan Gardner, John Greves and Kevin Knowles› “Why DC fiduciary outsourcing?” by Mike Barry

FOR DB PLANS:› Russell LDI Update (monthly)› “Introducing TFBO: A tool to help you understand the long term economics of your DB

plan” by Marcus Muetze

USI- 20087-07-15

www.russell.com/institutionalwww.russell.com/ca/institutional

Russell Communiqué

To learn more about our services for institutional investors or topics in this issue of Communiqué, contact your Russell representative or one of these associates.

David Rothenberg Managing Director U.S. Institutional—Large Market

800-455-3782 [email protected]

U.S. contact

Dexton Blackstock Head of Institutional Business Development Institutional Investment Solutions

416-640-6202 [email protected]

Canadian contact

Myth busters: Part 1 · 4 Myth busters: Part 1 By: Michael Thomas, CFA, Chief Investment...

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