- In unprecedented times, clients are struggling to build well-diversified portfolios, as well as grappling with the rising cost of guarantees and management of very expensive liabilities. After depending on fixed income diversification for decades, they must find new ways to hedge their exposures while growing assets.
- Asset classes such as infrastructure, private equity and real estate deliver the required combination of diversification and yield. But they bring challenges of their own because they are illiquid, with lock-up periods, so do lend themselves less than other asset classes to dynamic asset allocation. It is an interesting conundrum and one we have to be mindful of when building long-term investment portfolios.
- Clients are seeking high-quality credit portfolios that are less likely to experience defaults in next year’s economic fallout. Our research-intensive approach is at the centre of doing this and allows us to build portfolios with quality bias and only intended exposures.
- Ageing and increased longevity of populations are also putting retirement planning under the spotlight. In 2018, for the first time in history the number of people over the age of 65 outnumbered children under five, according to the United Nations. By 2050 there will be twice as many over-65s as under-fives.
What kind of customised solutions are our institutional and sub-advisory clients looking for in today’s yield-starved, default-conscious and ageing world? With developed world government bond yields as low as ever before seen, the traditional diversification into fixed income duration and credit is no longer so effective.
The need for well-diversified strategic portfolios
In these unprecedented times, clients are struggling to build welldiversified portfolios, as well as grappling with the rising cost of guarantees and management of very expensive liabilities. After depending on fixed income diversification for decades, they must find new ways to hedge their exposures while growing assets. How can we create strategic portfolios that replicate the diversification historically provided by fixed income when yields were higher?
Asset classes such as infrastructure, private equity and real estate deliver the required combination of diversification and yield. But they bring challenges of their own because they are illiquid, with lock-up periods, so do lend themselves less than other asset classes to dynamic asset allocation. It is an interesting conundrum and one we have to be mindful of when building long-term investment portfolios.
Asset classes such as infrastructure, private equity and real estate deliver the required combination of diversification and yield... but bring challenges of their own
As previously mentioned, taking a dynamic approach to asset allocation is an increasingly popular approach. This involves using signals to identify a range of market states – for instance, bearish, neutral, bullish and highly bullish – and actively dialling risk in a strategic portfolio up or down. Portfolios can be quickly switched to pre-determined allocations designed for each of these states using liquid instruments.
The need for customised quality credit
A lot of our clients are wary that 2020’s severe recessions will translate into credit defaults in 2021/22 when government support for the economy is withdrawn. China is already feeling the credit consequences of Covid-19. As its government has withdrawn the support it provided to state-owned entities, so there has been a wave of bond defaults. Europe and the US are later in the Covid-19 cycle than Asia, and there is a danger they may face similar credit risks at some point.
Those of our clients investing in multi-asset or credit portfolios are keenly aware of such risk. Consequently, they are seeking high-quality credit portfolios that are less likely to experience defaults in next year’s economic fallout. Our research-intensive approach is at the centre of these portfolios and allows us to build portfolios with quality bias and only intended exposures.
Demographics and regulatory pressures
Our research-intensive approach allows us to build portfolios with quality bias and only intended exposures
Insurers and advisory clients face this issue when delivering investment or guarantee solutions to their clients. This, together with the emerging challenge of growing regulations as well as the introduction of two new accounting standards (IFRS 9, financial instruments; and IFRS 17, insurance contracts), forces firms to rethink how they match assets and liabilities and approach product development in 2021, and therefore how they construct well-diversified and capital-aware portfolios.
Conclusion
