The impact of COVID-19 has made long-term strategies that embrace resilience a high priority for pension funds to ensure there is a smoother ride during turbulent times.
More than 1,000 delegates heard at multiple sessions during the IPE Conference & Awards 2020 last month how crucial it is to motivate asset managers to invest with a long-term view, especially during a financial crisis.
To build a resilient strategy that can navigate various investment scenarios, investors need to identify the drivers of risk and return, while maintaining a focus on the strategy’s objectives.
A resilient investment strategy should be diversified and balanced across asset classes in terms of risk and return, but also include a protection portfolio to protect against interest rate and inflation.
Even well-diversified portfolios can carry hidden biases and correlations, which can lead to excessive weightings and overexpose investments to risks.
COVID-19 has brought many issues into focus, in particular, the challenge of where to find attractive investment opportunities is clear: while equities may hold the prospect for potential capital appreciation, unlike bonds, most multi-asset investors are unlikely to re-allocate capital away from bonds into equities.
Diversification is more than the sum of different assets – it requires an understanding and calibration of the drivers of risk.
At an IPE Conference panel, Amin Rajan, CEO of CREATE-Research, told the audience that investors will seek to build liquidity in portfolios as a way to protect them from heightened volatility over the coming years.
Investors need to bear in mind that a truly resilient portfolio can navigate short-term shocks while capitalising on long-term trends to optimise risk-adjusted returns across market cycles.
Venilia Amorim, editor, IPE.com