The case for building resilience into portfolios

The case for building resilience into portfolios

Increasing market uncertainty underscores the need for a thoughtful approach to portfolio construction that builds resilience while aligning with long-term investment objectives.

A changing market regime

Increasing market uncertainty underscores the need for a thoughtful approach to portfolio construction that builds resilience while aligning with long-term investment objectives.

Resilience defined

To build resilient portfolios that can navigate diverse investment landscapes, investors need to identify the true drivers of risk and return, while maintaining a focus on portfolio objectives. We believe resilient portfolios should be:

  • Risk-aware: able to manage risk and mitigate volatility
  • Diversified: provide exposure to multiple sources of uncorrelated return drivers
  • Nimble: flexible enough to capture changing market opportunities
  • Consistent: deliver steady risk-return profile across market cycles

Resilience in action

Portfolio resilience is not simply a defensive reaction to current market volatility. A truly resilient portfolio can effectively mitigate short-term shocks and navigate long term-trends to optimize risk-adjusted returns across market cycles.

  • Building resilience: Different approaches, common goal

    Portfolio resilience: effectively navigating short-term shocks while capitalizing on long-term trends

    Today’s market challenges

    Philip Hodges, Head of Research for the Factor-Based Strategies Group

    The easy money is off the table. We've had a long equity bull market. Bonds have done very well. It's likely that the returns from the equity market, the bond market are lower going forward so investors need to think about what are other sources of risk that they can add to their portfolio? And start building portfolios that have more exposure to those.

    Rick Rieder, Chief Investment Officer of Global Fixed Income & Head of the Global Allocation Investment Team

    You’ve got to be really careful in your portfolio how you are diversifying a portfolio, how you manage your liquidity, how you think about how assets will react in unstable environments. And that is a really big deal today in terms of how we think about markets.

    James Keenan, Chief Investment Officer and Global Co-Head of Credit

    The last 30 years have been about boom and bust, from an investment standpoint, as you got late in a cycle, you were always really moving into a far more defensive camp in order to invest after that dislocation or the pullback. The cycles are probably going to be more frequent and more mild to the upside and downside. And so, when I think about that, we’re no longer in a boom/bust environment; we’re in an environment where growth is going to be lower, inflation is likely to be lower for a long period of time, and therefore, aggregate returns are probably lower in asset classes over the long term.

    Philip Green, Head of the Global Tactical Asset Allocation team

    I think there is a consensus around the credit cycle and even the economic cycle that we’re in, are in late stages. That’s not so clear to us. I think many investors in the market itself have been talking about we’re in a late cycle for many years now, and the cycle seems to continue on.

    Taking action

    Rick Rieder:

    We spend a lot of time on marginal contribution of risk, with every individual assets, every individual sector. And if you understand that and how every new asset that goes in impacts your risk—you don’t create these massive swings of up, down performance that is just stable over time. Doesn’t mean that you’re the best performance in good markets, but you’re not going to be the worst in bad and you are just going to create consistent good Sharpe ratios, consistent returns for clients.

    Philip Green:

    Believe it or not, volatility, a lot of volatility in prices, market prices, is a good thing for tactical asset allocation because it gives us and other macro investors the opportunity to take advantage of changes in prices. And for us, what we’re looking at is the ratio of how volatile fundamentals are, and we focus on a number of key drivers of asset classes, and its’ really the volatility of fundamental versus the volatility of prices, prices of stocks and bonds, and currencies and such. In the environment we’re in now, the volatility of prices relative to the volatility of fundamentals, both are moving. The volatility of prices is quite a bit higher, and so what that does is it gives us a good opportunity to add value for our clients.

    James Keenan:

    Credit as an asset class adds resiliency and diversification to an overall portfolio. When you think about credit in general, we kind of think about it as a senior equity. At the end of the day, when you invest in sub-investment grade credit, bank loans, high yield bonds, or private credit markets, essentially most of the return you’re going to get is spread risk that is tied toward the health of corporate profits. So, when we look at the aggregate portfolio and we think about adding credit to the long term as opposed to a tactical allocation, we look at an asset class, broadly speaking, that has become largely available now through the growth of the market as banks have reduced their exposure to it, and something that reduces the volatility or exposure to say duration risk or the sensitivity as you get to interest rates in fixed income assets. But also, it reduces the volatility or drawdown risk that you might see in your equity portfolio. So, from a long-term perspective, we really view credit as being a strategic asset in a broadly diversified portfolio.

    Philip Hodges:

    We believe the economy is starting to slow. The easy money of equity bull market is gone. This is really the right time, we believe, to start diversifying portfolios in to exposures that do well in different market environments. So, build resilience in to portfolios by including exposure to interest rate risk, or inflation risk, or equality tilt within equities, or a low volatility tilt in equities. These things help to build resilience but maintain returns of your investment portfolio.



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