5 Ways to Supercharge a Portfolio Against a Blah Tomorrow, per CAIA

The group assembles an allocation strategy designed to overcome the meager results expected ahead.

Expect so-so investment returns over the next 10 years—likely around 3% to 4% annually for a 60/40 portfolio. That’s the CAIA Association’s dour outlook, which is way down from the sparkling results in recent times.

But these outside-the-box thinkers—the acronym stands for Chartered Alternative Investment Analyst—aren’t submitting to such an uninspiring tomorrow. They’ve assembled what they call a “Portfolio for the Future,” an asset allocation aimed at doing better than low single digits.

The group gathered a set of wise folks to come up with five qualities necessary to deliver a more robust performance than the meager forecast of 3% to 4%. “We are here to declare the rise of a new era, one where fiduciaries will need to work smarter and more creatively to deliver investor outcomes,” writes John Bowman, CAIA’s executive vice president.

This allocation is composed of these values:

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Diversification. Commonfund CEO and CIO Mark Anson argues that it’s necessary to have a more diverse allocation “across asset classes, geography, sector, and purpose” than is typical nowadays. This collection would feature uncorrelated beta and risk premiums. It would combine income generation, inflation protection, capital preservation and principal growth.

In the past, investors figured stocks could only go up, Anson declares. So they turned to low-cost products that “created complacency and beta creep,” meaning strategies picked up more market risk over time.

Private, less liquid capital. There’s a strong case for private capital focused on earlier stage, new economy and growth companies, says Andrea Auerbach, Cambridge Associates’ global head of private investments. These countercyclical plays, she says, are “detached from the short-term machinations of [the] public market” and give investors a better exposure to global markets.

Certainly, she acknowledges, these investments can be opaque and laden with high fees, and require patience. They aren’t usually very liquid, either. Investors will need risk tolerance and must examine how much income they require, which means there must be a lot of due diligence up front.

Fiduciary mindset.  Roger Urwin, global head of content at the Thinking Ahead Institute, believes that honest dealings with investors is a vital cog that is sometimes missing in the financial machine. Investment professionals, he finds, still have “work to do on this journey through mitigating conflicts of interest, asymmetric payoffs, incentive dislocations between limited partners (LP) and general partners (GP), and unnecessary financial engineering.”

They need, he says, “an existential understanding of purpose, alignment, and service to the client,” which leads to “behavioral norms that influence ownership structure, client communication, compensation, fees, talent recruiting, culture, and definition of success (benchmarks).”

Sustainability and inclusiveness. Investors these days demand both positive financial and social outcomes from their assets. They look for good environmental, social and governance ratings and other non-financial disclosures, says Anne Simpson, global head of sustainability at Franklin Templeton and former managing investment director of board governance and sustainability at the California Public Employees’ Retirement Fund.

This entails weaving carbon footprint, progress on diversity, equity and inclusion (DEI), human-rights records, and labor practices “into their security evaluation, risk management, and return expectations.”

Innovation to gain alpha. “Firm culture, governance, and technology are much more predictive of sustained performance than previously thought,” insists Ashby Monk, executive director, Stanford Research Initiative on Long Term Investing.

The new portfolio “will be driven by firms that innovate and exploit new organizational and operational models to save cost, reduce risk, and pioneer new investment ideas,” Monk says. Investment professionals now “find themselves competing over attaining these goals,” he contends.

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