Last year was not the first time that the strategy has underperformed severely, and its prospects in the coming years appear linked to the path of real rates.
Compared to late 2021, part of the normalisation happened (fast) and the outlook is at least less unfavourable, in our view.
The real question, we believe, is how a multi-asset portfolio can be better engineered for a smoother journey across a variety of landscapes. Not a revolution we believe, but rather a continuous evolution. But what enhancements shall we consider?
Risk-based investing as a relevant investment discipline
Considering a very liquid multi-asset approach, we believe that risk-based investing, focused on balancing portfolio risk contributions rather than capital allocations, makes a lot of sense to remain agile and adaptable.
Of course, a robust risk-based approach must consider a wide variety of asset classes and rebalancing techniques.
A richer and more robust risk-based philosophy allows to consider fundamental anchors, as opposed to a simple mathematical formula applied equally and mechanically.
A robust risk-based approach also suggests that risk can take different meanings (not only volatility), can be measured in various ways and offer lots of flexibility.
Risk-based investors aim to identify a variety of factors that impact asset classes returns and their behaviour over time.
They read markets through the lens of risks, that constantly change over time and warrant a continuous monitoring and rebalancing discipline to modulate portfolio allocation as market conditions change.
It calls for flexibility and focuses on adapting rather than forecasting.
Expanding to medium and long-term investments
Using our own experience managing Lombard Odier’s pension fund for Swiss employees, we expect such a risk-based strategy to represent up to a third of a portfolio.
By managing a share of the portfolio with a very liquid and risk-controlled process, it unlocks the opportunity to lengthen the investment horizon of other investments.
In today’s landscape, we see various opportunities to exploit a longer investment horizon.
Over the medium-term (three to seven years), given the rise in yields and today’s better alignment between yields and balance sheet return requirements, we can commit more assets to a buy and hold credit portfolio with a wider range of ratings (especially across the BBB-BB universe), implemented actively with a focus on quality issuers.
Over longer horizons (above seven years), investments can be allocated towards less liquid assets and opportunities: real estate, private equity and debt, infrastructure.
Finally, we believe that in a world of high uncertainty and increased shocks happening over shorter time frames, investors should allocate structurally to a set of alternative strategies that provide convexity; in other words those strategies that could deliver a high return and benefit from market shocks and rise in volatilities, potentially at a cost of delivering low returns in supportive market conditions.
