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According to the latest issue of The Cerulli Edge: Global Edition, the dramatic rise in geopolitical risk has shaped the investment landscape this year and will continue to do so well into 2012. Until confidence in politicians is restored and markets reach a sustainable low, managers will be judged on their ability to protect clients’ money from market oscillations. Cerulli expects that many firms may have to review their strategies.
The notion of a risk-free asset class, nebulous at the best of times, has been debunked, and managers are taking a hard look at investment benchmarks and the models being employed to calculate risk. Some observers believe that asset management models are outdated, and that risk strategies are built on flawed assumptions, because managers typically place more emphasis on the analysis of economic issues while excluding political risk from their calculations. In other words, many managers think they are more diversified from a risk perspective than is actually the case.
“Investors are increasingly distrustful of highly quantitative risk modelling structures. As one source pointed out, these machines cannot be turned off, and all too often there is an element of luck involved. In the case of a commodity trading advisor, this might come down to the time period built into the model,” comments Barbara Wall, editor of The Cerulli Edge: Global Edition.
“While institutional investors now have access to a range of clever standalone vehicles that deal solely with equity volatility, many are getting back to basics and asking managers to be more focused on hard numbers that are easier to analyse such as cash flow, operational gearing, and balance sheet strength to decide if an investment is good value. That may mean owning assets that on the face of it are not obvious bedfellows,” Wall continued.
As well as devising ways of dealing with volatility, managers are being urged to consider the impact of inflation on client portfolios. The first steps have been taken to develop strategies to deliver new sources of inflation-busting real returns. Some managers are looking at opportunities in the corporate bonds segment; others are exploring exchange-traded fund (ETF) solutions to fight inflation, including passive sovereign-linked ETFs and actively managed inflation products……
Other findings in this issue:
Most volatility investors are interested in hedging risk – two-thirds are looking to reduce their exposure to stressful events. Regulatory pressure will increase demand for risk hedging strategies, but demand will also come from another source. There are already a small but significant number of investors playing volatility in its own right.
There is roughly US$253 billion assets under management that are marketed, either overtly or more subtly, for their inflation-protection attributes.
Infrastructure is often painted as a perfect fit for pension and sovereign wealth funds. It gives off regular and steady income over the long term; its income stream behaves in a predictable manner, matching pension fund liabilities; and it suits an investor in no rush to get money out again. In Asia Pacific, it has another advantage: an inflation hedge.
These findings and more are from The Cerulli Edge: Global Edition, October 2011 issue.
