When traditionally uncorrelated assets begin to move in step, portfolio managers are put under pressure to reassess their optimisation strategies.
Travis Schoenleber, managing director of global investment firm Cambridge Associates, says there may be a real push at the moment for portfolio managers to change their approach as boards look at historical performances in light of a long bull market in equities.
With persistently low interest rates, asset owners using specialist absolute return managers, which charge higher fees or a bigger percentage overall, would see these charges eating into returns, he says.
“What has tended to happen is the results aren’t necessarily what you would have expected, given pre-optimisation,” Schoenleber says. “If you take the last nine years, someone who was 100 per cent invested in US equities would have done better than a multi-asset portfolio.
Schoenleber says the real test for optimised portfolios will come when there is a market correction because investors do not know if there has been a fundamental change to the underlying mechanics of markets.
US economist Harry Markowitz’s modern portfolio theory, for which he won the Nobel Prize in 1990, has become the basis for asset managers globally to attempt to reduce overall risk in their portfolios by using a mixture of diverse, uncorrelated assets. When previously uncorrelated assets used as diversifiers start moving in step, which has been the pattern of US bonds and equities this year, it raises concerns.
Market analysts say investors relying on bonds and equities to counteract each other are seeing these changes as a correlation risk and a portfolio wrecker. Some have suggested that investors explore other cheap diversifiers, such as factor plays on volatility.
The session on portfolio optimisation at the Absolute Returns Conference, to be held in Sydney, September 19-20, will include Future Fund head of debt Craig Dandurand, Local Government Super portfolio manager John Peterson, Mutual Trust investment research director Kathryn Young and Albourne Partners chief executive John Claisse. The session is titled, “Exposing the core: premature optimisation and absolute return”.
Schoenleber says that, in a low-growth environment, more and more returns seem to be dependent on monetary policy to add value and optimisation strategies can look “underwhelming”.
“That’s what everybody is trying to figure out right now,” he says. “If this continues for a prolonged period, do we need to rethink how we optimise asset allocation this time, and when?”
Schoenleber spoke with Investment Magazine ahead of moderating the session “Exposing the core: premature optimisation and absolute return”, at the Absolute Returns Conference, to be held in Sydney, September 19-20.