2020 Knowledge Brokers

James Walsh

Global Head of Portfolio Advisory
Albourne America
San Francisco, California

James Walsh comes to his current position as Albourne’s global head of portfolio advisory with a wide-ranging background. With university economics training, he first worked as a senior economist at the Confederation of British Industry and as a macroeconomic forecaster at the Economist Intelligence Unit.

He moved into pension investing at Hermes Pensions Management, and then into university endowments as Cornell’s chief investment officer, where he navigated the Global Financial Crisis. Then it was on to a macro hedge fund, Cayuga Capital Partners, which prided itself on good alignment with investors due to its inflation-linked hurdle rate. He served as both CEO and CIO.

The English-born Walsh moved over to Albourne in 2012, starting at its London headquarters. He went back to America, where he leads a 60-member team overseeing institutional portfolios around the world from his San Francisco office.

CIO: What actionable thing have you learned over the course of your career that has proven itself this year?

Walsh: What has really stood out in 2020 is how important it is to have a plan, and then stick to it. Or, as one of our clients put it: “…never put off to tomorrow what you can do today.” In this case, they were commending themselves for having rotated out of managers who no longer fit their portfolio ahead of the gyrations of March. It is all too easy to leave the heavy lifting until tomorrow when things are going well, but when a market hits volatility, you only want the A-team featured in the portfolio.

We’ve seen how important a plan is on many levels in 2020. At an institutional level, a strong governance structure, clear responsibilities, and accountability together allow investors to take advantage of opportunities. These opportunities can be fleeting; it was great to help clients act opportunistically and/or upgrade some of the names in their portfolios earlier in the year. Since then, we’ve worked with clients to pivot into new opportunities, which will benefit from a very different economic landscape, supplementing the plan they already had in place.

Having a plan also means making sure that the board, trustees, and stakeholders understand the implications of unforeseen events on their portfolio; what it means for returns, liquidity, or even payout pressures, and appreciate the safeguards that are in place. It is also about briefing them as the crisis develops, so that everyone can calibrate what is expected, and what is not. 

Of course, 2020 has required firms to initiate another kind of plan, their business continuity plan! We’ve not only been impressed by how managers and clients have adapted to the new way of working, but flattered by the substantial increase in clients’ due diligence requests and the rise in hits to the Castle (Albourne’s extranet); a global presence and an industry-leading technology platform has served our clients well in 2020.

Post COVID-19, due diligence clearly has its challenges, but again it is notable how the industry has adapted and harnessed technology. Firms have generally become more willing to share information electronically, and video conferencing means it is easier to schedule multiple meetings and for a wider range of team members, on both sides, to attend. They have also become less scripted in the months since the lockdown, but perhaps that will change over time. I am also hopeful that the use of technology, even after we go back to in-person meetings, will lower the barriers to new and emerging managers, reducing the advantage that firms with deep resources and employees that can jump on a plane with little notice, currently have.

While we truly miss traveling to meet clients, by embracing the using of video conferencing, we’ve not only seen clients even more engaged with the depth and breadth of our resources, but we feel we become even more integrated into their processes.

CIO: What investments (specific securities or sectors) look good to you now? And why?

Walsh: We are facing an unprecedented level of uncertainty over the next few years, so we need to look not only at where the returns are likely to be strongest, but also where the risks are greatest.

 On the return side, being the provider of capital in dislocated sectors and strategies, a.k.a. distressed, has the potential to be highly rewarding. That said, you must be a brave person to think you know the timing, strategies, and approaches that will be most successful with a high degree of certainty. Hence, we like managers that have the strength to pivot between opportunities and have the depth to dig deep if things don’t go as expected.

On the risk side, I am concerned not only about the medium- to long-term inflation risk, but also the potential that traditional portfolio hedges, e.g., bonds, will be ineffective. Of course, these are linked: an inflation-triggered selloff in the equity markets would likely coincide with a selloff in bonds, potentially of an unprecedented order.

Though the sharp contraction in demand caused by COVID-19 means an imminent rebound in inflation is very unlikely, the medium-term outlook is a lot less rosy for two reasons.

First, the large increase in public debt means policymakers will be incentivized to pursue higher inflation to reduce its real value. Second, in addition to providing a demand shock, COVID-19 will be a negative supply shock; think of all the businesses that have already closed, the unemployed who will find it hard to get back into the labor market, and the structural changes we are seeing in the economy. These will exacerbate the effects of the recent slowing in world trade and the re-wiring of supply chains. For this reason, we like assets that not only have strong asset backing, but where there is some form of inflation linkage.

CIO: What ones don’t? And why?

Walsh: Sovereign debt looks less like a risk-free asset than  I can ever remember. In recent years, US Treasuries have been the Goldilocks asset class, providing income, a healthy total return, and diversification. If the Fed moves to yield curve support, as the market seems to assume, this will reinforce the asymmetry of bond returns that we have already seen since March. Portfolios still need liquid and uncorrelated assets, not only because we live in uncertain times, but as increasing portions of portfolios are committed to illiquid asset classes.

We’ve continued to work with our clients both on the more traditional absolute return portfolios, but also on portfolios which are designed to provide convexity in periods, such as March. By design, these provide better bang for the liquid buck than other strategies.

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