Today's extraordinarily challenging market conditions have heightened investor uncertainty. High inflation is set to remain for the foreseeable future, following a downward trend over the last three decades. Central banks forecast that tightened monetary policy will result in sustained elevated interest rates. These shifts have dramatic implications for traditional asset classes, impacting portfolio risk management.
Many agree that the re-emergence of inflation is structural. The emergence of geo-political conflict and the Covid pandemic has caused a re-think of supply chains. This, along with supply-side energy constraints and investment in the renewals transition, will keep prices significantly higher than has been the case.
It's now clear that market risk is exceptionally high. As cash and bonds deliver low, if not negative returns, investors have been channelling funds into equities and property, where valuations are historically high but laden with risk. But equities as a broad asset class have become increasingly volatile following a period of over-valuation.
The significant risks in the market have spurred renewed interest in active portfolio management. Dynamic Asset Allocation is an approach that has come into its own as risk management has become a primary consideration. This contrasts with previous decades, as the long-term cycle of steadily falling inflation propelled stock prices upwards.
However, current market dynamics have reversed the cycle by making it difficult for passive investors to generate sufficient returns with prudent risk management.
Active investment managers can react quickly to protect capital while selectively making opportunistic investments to boost returns. Significantly, active managers can more readily diversify by investing in alternative assets, such as derivatives, hedge fund strategies, precious metals and private equity. Alternative assets can offer diversified portfolios superior risk-adjusted returns than if they only use traditional asset classes within an SAA mix. Helping to lessen downside risk not only protects against drawdowns but can also bolster portfolio returns over time.
Passive investment solutions currently have fewer diversification options available, particularly in the alternatives space, limiting their risk management options.
Dynamic Asset's managed account solution is a prime example of successful active portfolio management. Dynamic Asset offers five unique portfolios that target varied returns within pre-determined risk parameters and time frames. The portfolios are managed using a forward-looking approach that is sensitive to market conditions and focuses on uncorrelated strategies and assets. Assets are specifically selected based on their ability to deliver on the return objectives. At the same time, strategies are employed to hedge against excessive risk. It is very different from the passive 60/40 strategic asset allocation approach that exposes capital to the mercy of market movements.
Attention to portfolio risk management plays a crucial role in delivering on return targets. Also, lower portfolio volatility can enhance client loyalty and satisfaction. The Prospect theory, developed by psychologists Daniel Kahneman and Amos Tversky, maintains that the distress caused by a loss is psychologically twice as great as the feeling of a win. Achieving clients' financial goals while easing their fears of significant losses results in overall lower business risk for the advice firm. It's an increasingly important consideration amid the advice industry's ongoing regulatory reforms.
Dynamic Asset offers a market-leading alternative to managing investment risk in high-risk environments.
Contact us to learn more about how the Dynamic Asset managed account solution can help your business manage investor risk and excel in today's investment climate.