Investors need to be intelligent about risk taking in volatile times, but the path they take won’t be identical, according to Mark Cestnik, managing director with TD Asset Management.
He compared investors dealing with risk to drivers in a roundabout. “Everyone should not be on the same path,” Cestnik said at the firm’s Making the right choices in a time of transition luncheon in Toronto on Wednesday.
Investors need to go beyond the 60/40 traditional portfolio and beyond simple manager selection, he explained.
Cestnik added that investors need to take a more progressive approach, which can include increasing bond exposure, using low-volatility strategies, trying out hedging strategies and/or diversifying using alternatives.
That path will depend on the investor’s desired destination. This, in turn, depends on their tolerance for volatility, the targeted rate of return, annual disbursements, funded status target and risk budget.
Investors have been stuck in the same environment for an extended period of time: low interest rates, low inflation, a weak Canadian dollar and slow economic growth. And it’s not going to change any time soon.
“These weak numbers will persist through 2015 and beyond,” said Cestnik.
So in this type of environment and volatile markets expected to continue, investors have to make intelligent risk choices. Some have already been doing this.
According to a recent survey of Canadian institutional investors by Greenwich Associates, investors had 27% of their total assets in domestic equities in 2004. By 2012, this dropped to 14%.
In the same time frame, investors have made modest increases to alternatives, mostly in the infrastructure, real estate and private equity spaces.
Industry trends show that plan sponsors are looking at plan design changes and adopting shared-risk arrangements, such as the target benefit plan, said Cestnik. And, they’re also less focused on peer group performance and market-based benchmarks.
But no matter which progressive approach investors take, the important point is that they make a move. As Cestnik says: “Exit the roundabout and choose the right path.”