The relatively stable market environment of 2013 through mid-2015 gave way to a period of market volatility in the third quarter of 2015, as concerns over the growth outlook in China and the prospects of Fed rate hikes destabilized risky assets globally. This volatility has continued in 2016, and we expect to see more such disruptions in the coming years as market participants react (and overreact) to ongoing macro uncertainty.
Meanwhile, low interest rates and above-average equity valuations present a challenging environment to meet long-term return objectives, making alpha generation all the more important. An opportunistic approach to investing can take advantage of market volatility and mispricings to add alpha at the total portfolio level, we argue in this paper, featured on Top100Funds.com.
The issue at hand is how institutional investors can behave more dynamically while managing the challenges associated with speed of response and the governance burden. There are a number of ways to build more dynamism into investment portfolios, which will be the focus of this paper. Plans can seek to do this in house, which means opportunistic ideas or dynamic tilts are evaluated and approved by trustees or their delegates (investment subcommittee, internal staff, or fiduciary manager). This could include dynamic asset allocation whereby tilts are applied against a strategic allocation, and more opportunistic approaches, such as adding new asset classes and strategies to take advantage of market dislocations. External investment managers could also be given more flexibility.
A few options we consider here are:
- Broader investment mandates.
- Idiosyncratic multi-asset funds.
- Hedge fund strategies.
Opportunistic investing creates governance challenges, particularly for an in-house approach, which should be addressed in advance.
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