A combination of asset allocation and a systematic investment framework, dynamic risk capital allocation can be employed to create resilient portfolios.
Rules-based investment strategies are like locking a car’s steering wheel in Sydney, pointing it to Perth and expecting it to reach its destination, said Brian Singer, the Chicago-based partner of global investment banking and asset management firm William Blair.
Somewhere on that car’s journey, there will be a Thelma & Louise moment where the car goes over a cliff, Singer told delegates at the 2017 Conexus Financial Absolute Returns Conference.
The head of William Blair’s dynamic allocation strategies team, which focuses on top-down fundamental investing and seeks to identify, evaluate, and benefit from the correction of discrepancies between fundamental value and price, said the pendulum has swung back to the macroeconomic view of almost 30 years ago.
Investment strategies need to be active and dynamic, he told the Summit. Singer is concerned that the proliferation of rules-based investment strategies, including passive and smart beta products, are making both credit and equity markets more fragile.
“There’s a lot of flow coming into the marketplace from these things,” he said. “It’s important [to William Blair’s team] to avoid those things. We want to take away those constants, take away the shackles and make it something that is much less fragile.”
Ride the tides
He described smart beta strategies as sets of rules packaged in an exchange-traded fund structure, something he called passive investing and likened to navigating markets wearing a straitjacket.
“Dynamic asset allocation is the pendulum swinging right back to where it was in earlier periods,” he said.
Singer explained that William Blair’s active investment strategy is focused on “riding the tides, navigating the waves and ignoring the ripples”.
He said being prepared to ride the tides was essential to the nature of being a long-term investor.
“That’s fundamental value investing; it’s what I did in the 90s. Doing a good job of it was necessary and sufficient to beat the next guy.”
Singer described his team as “anti-fragile”. He said its approach had emerged in an unconstrained way, as the team had researched, implemented and reviewed many potentially incompatible ideas about investments, so they could either survive or be destroyed. These ideas and reviews cycle through the firm’s processes daily, he said.
“It’s the antithesis of what’s happening with these rule-based strategies and the move to passive,” Singer said. “All of these are not terrifying yet but they’re getting to be terrifying for me as the days pass.”
Shift to risk premia
William Blair’s clients around the globe are shifting to risk premia and currency strategies as they seek diversification.
“Everyone wants diversification when the market’s going down. It’s code for you better protect my downside,” he said.
At the same time, rules-based strategies and greater regulation of banks are building rigidity into the system.
“The Volcker Rule is taking away the ability of US investment banks to expand and contract their balance sheets and absorb and dissipate shocks,” Singer said.
“We’ve gotten ourselves into a place where the market itself is very fragile and with each day of activity like this it’s becoming increasingly fragile.”
Conexus Financial is the publisher of Investment Magazine, Top1000funds, and Professional Planner. For details on upcoming events visit conexusfinancial.com.au/events.
