CONTRIBUTORS
Subash Pillai
Head of APAC Solutions
Peter Blue, CFA, CAIA, FRM
Head of Alternative Solutions
Vaneet Chadha, CFA
Portfolio Manager
Paul Fraynt
Portfolio Manager
A common challenge
In our conversations with asset owners around the world, one question keeps arising: How can investors build more resilient portfolios?
There are a multitude of reasons why investors feel vulnerable. First, inflation has proved difficult to squash and the risk that it regains a foothold remains. Non-traditional fiscal policies could exacerbate inflation, cause a one-time price shock, or dampen growth. Meanwhile, the world is increasingly becoming multipolar, driven by factors such as geopolitical conflicts, near-shoring supply chains, rising populism and political division.
Moving forward, where do investors turn? Multiples on US equities have recently widened to a near-record and credit spreads are close to historic lows. Meanwhile, investors still feel the pangs of 2022, when bonds proved inadequate hedges against equity drawdowns.
In this paper, we turn to our investment experts, as part of a roundtable conversation, for their insights on this timely topic and to share a framework for evaluating different approaches to building resilient portfolios.
Our conclusion
Completely eliminating investment risk is not possible. But it is possible to create bespoke portfolios that reduce risk considerably, while allowing for institutions to hit their goals and also avoiding steep fees.
The techniques described in this paper are designed to reduce drawdowns and allow investors to access cash when needed. We’ve observed that many investors are willing to keep pace or even lag slightly when equity markets are up, if they are protected during downturns. History might not repeat, but it often rhymes and there’s a feeling of urgency and an understanding that should an inflation shock like 2021-2022 occur, stakeholders will have far less sympathy for a similarly sized drawdown.
As both consultative partners and asset managers, we are committed to working closely with our clients to provide the most suitable advice and support.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results. To the extent a strategy invests in companies in a specific country or region, it may experience greater volatility than a strategy that is more broadly diversified geographically.
Commodity-related investments are subject to additional risks such as commodity index volatility, investor speculation, interest rates, weather, tax and regulatory developments.
Investments in many alternative investment strategies are complex and speculative, entail significant risk and should not be considered a complete investment program. Depending on the product invested in, an investment in alternative strategies may provide for only limited liquidity and is suitable only for persons who can afford to lose the entire amount of their investment. Diversification does not guarantee a profit or protect against a loss.
An investment in private securities (such as private equity or private credit) or vehicles which invest in them, should be viewed as illiquid and may require a long-term commitment with no certainty of return. The value of and return on such investments will vary due to, among other things, changes in market rates of interest, general economic conditions, economic conditions in particular industries, the condition of financial markets and the financial condition of the issuers of the investments. There also can be no assurance that companies will list their securities on a securities exchange, as such, the lack of an established, liquid secondary market for some investments may have an adverse effect on the market value of those investments and on an investor’s ability to dispose of them at a favorable time or price.
Active management does not ensure gains or protect against market declines. Diversification does not guarantee a profit or protect against a loss.