Tim Filla

Title: Senior vice president and consultant
Firm: Meketa Investment Group
Assets under advisement: $1.4 trillion
Number of consultants at firm: 62
Client type: Multi-employer plans, public fund, corporation, endowments and foundations, healthcare organizations, financial intermediaries

Stability within a portfolio is chief among the concerns of any portfolio manager when creating a strategic asset allocation strategy. Fixed income assets have traditionally been used as an anchor to help build stability while also providing meaningful income.

“We’re back down at the bottom of the historical range, as far as what most fixed income assets are yielding,” says Tim Filla, senior vice president and consultant at Meketa Investment Group. “Lots of fixed income assets in the world are trading at negative yields, and that has a major impact on both forward-looking returns and the amount of protection they may provide for clients’ portfolios.”

Filla adds that the low rate environment can also drive equity valuations which have hit all-time highs in the United States. This creates a challenging trading environment for more conservative, value-oriented investors.

Filla is especially concerned about central bankers losing credibility. “The Fed obviously had a major pivot from a two-year hiking cycle, which began with a sudden change in tone in the earlier part of this year continuing into a cut in July. Was this shift driven by increased political pressure, the strong reaction of the markets to the December hike, or a downgrade to the economic outlook? [Any] of those three is somewhat troubling, but the first two raise concerns about the Fed’s influence and credibility. That’s something we are deeply concerned about and influences how we structure our portfolios.”

Filla and his team leverage Meketa’s research teams to navigate through these sorts of obstacles and “to bring the best investment ideas they have.”

Risk-Mitigating Strategies

According to Filla, rather than relying solely on fixed income to provide stability within portfolios, he incorporates risk-mitigating strategies. Those strategies include a combination of tail-risk hedging, medium-term trend following, and discretionary global macro. The low rate environment has also led his team to look for ways to capture the attractive characteristics of inflation-hedging assets like gold.

By including risk-mitigation practices in portfolio construction, Filla can be responsive to changes in the market. Risk mitigation has helped Filla and his team position around growing tension between the US and China. Currently, the primary issue is trade, but Filla believes that trade is just one aspect of what will be a decades-long struggle between two nations as China emerges as a global power.

The speed of information delivery and the never-ending global news cycle are other factors that influence portfolio stability. “We’ve gone down the road to where markets are responding to tweets,” Filla says. “It’s a different information flow than what we’ve had in the past, and it requires additional monitoring and flexibility to account for it.”

Such an evolution in the accessibility of data and information requires investors to put tremendous effort into sorting out the noise from the truly valuable information.

Not only has the evolution in technology made information more accessible in real-time, but it’s also led to rapid dissemination of particular information and opinion to specific populations, resulting in quite a divisive spectrum of perspectives on the world. Filla explains, “the global polarization of political environments is a major concern for market stability, in the US and across the world, whether it’s the sentiment leading to Brexit, what we’re seeing domestically, the yellow vests in France, or protests in Hong Kong. The increasing polarization requires enhanced monitoring of political circumstances. You are starting to have very significant impacts from these types of situations.”

Between the global low-interest-rate environment, rising tensions between the US and China, and widespread political polarization, Filla says, “conditions are unlike anything we have experienced in the past, so relying on the playbook of the past doesn’t make much sense to us. Our team is constantly looking for innovative ways to protect our clients’ assets.”

By Bailey McCann