Investment conditions are putting pressure on asset allocators as investment decision makers to be more agile and flexible, says Sonya Sawtell-Rickson, investment director at QIC, who questioned whether the old approach to strategic asset allocation, with a little bit of tactical tilting, is still the most appropriate approach.
“Have we got the balance of risk right between strategic and tactical allocation?” she says. “As an industry we are quite data-centric, and there is no data for the situation we are in.”
In a panel conversation discussing blue sky investing at the Absolute Returns Conference, Sawtell-Rickson said some of the things QIC has been doing is reducing duration exposures in its portfolio.
This has meant increasing investments in low duration risk exposures, including exposure to style premia, insurance strategies including catastrophe and life, alpha strategies, and floating private credit.
“We have also been accepting pro-cyclical exposures where risk adjusted returns are strong and we’re being rewarded for risk, such as break even inflation and we are considering managed distributions more and more, such as tail hedging.”
She says that QIC is also pursuing broader manager relationships.
“We don’t know how the world will evolve and investment opportunities will present, but we won’t have 12 months to due diligence managers before those opportunities disappear,” she says.
Lastly, QIC is over-communicating and bringing stakeholders on the journey, including the message that return expectations are lower and risk is heightened.
Steve Shepherd, head of Asia Pacific for Capital Fund Management, had three messages for investors wishing to be blue sky investors.
Know what your risk measure is: “We all have a risk budget, usually expressed in some kind of volatility. Use your risk budget and use it well. Keep risk on the table, but build a portfolio to maximise the risk adjusted return and keep the pedal to the floor.”
Drawdowns happen, figure out how much you can afford to lose in a drawdown: “We’re all embarrassed by drawdowns because we have to explain them to investment committees or clients, but we all know they happen. But work out what you can afford to lose when the crisis hits. Decide the drawdown you can live with and design your portfolio with that in mind.”
Don’t confuse entertainment for information: “We live in a world full of crises. Alongside that there’s a world full of storytellers telling us what it means if those things do or don’t happen. Instead of listening to the storytellers, a blue sky investor might say I can build a portfolio that’s resilient to crises rather than trying to steer around them.”
Hendrie Koster, director of strategic research at Mercer was the chair of the panel discussion.