In building a resilient portfolio, institutional investors can use lessons from the past to draw on market similarities throughout history.
Speaking during a session sponsored by BNY Investments Canada at the Canadian Investment Review’s 2024 Investment Innovation Conference, Mitesh Sheth, multi-asset chief investment officer at Newton Investment Management, said many of the challenges investors have been experiencing aren’t new, including managing portfolios amid periods of crises in banking sectors stemming from supply chain disruptions, shortages in commodities and the resulting inflation.
“We’ve seen equity market crashes come out of nowhere, followed by incredible equity market rallies that nobody could have predicted or seen for the following few years.”
When examining many of the actuary models and data sets, that data is often viewed in a single market regime, said Sheth, noting he prefers to analyze data through the lens of different periods of time to remove any instinctual bias and recognize other times when markets rose and fell drastically over the course of two to four years.
The markets have performed in times of deglobalization and through 40 years of globalization, he said, but past is prologue and, in the midst of the Russia-Ukraine conflict, deglobalization is becoming a priority for many countries around the world. At the same time, forces are at work that will prove challenging for quant models to decipher, he added, noting fiscal policy is shifting towards big government, the unknown short- and long-term risk-return of decarbonization and the shift from human intelligence and human labour to an artificial intelligence-driven economy.
In the past, said Sheth, the go-to risk management instrument was bonds. However, this mechanism doesn’t always translate to current times. “In environments where inflation is higher or more volatile, bonds are far more correlated with equities. I don’t know if that’s going to be the case going forward, but I know that we can’t just rely on fixed income to provide resilience in our portfolios.”
There are periods in which gold and precious metals can be really valuable and currency can provide some defence, he said, pointed out a portfolio of hedges allows investors to rotate between different strategies. “If we’ve got no idea, we can diversify across all of them and hope to provide some resilience in our portfolios as we look to achieve long term, real returns. There is no silver bullet.”
Indeed, over the next 10 to 20 years, investors that can build a portfolio of diversifiers to be able to withstand shocks will be the ones to admire or beat, he added. “It’s really this idea we call multi-dimensional investing or multi-dimensional risk management.”
Read more coverage of the 2024 Investment Innovation Conference.