portfolio construction

There's much to learn from history, but every time is different when it comes to markets. Inflation in the 2020s has been very unlike that of the 1970s. The inevitable recession that did not occur was likely prevented by unprecedented fiscal stimulus. Going forward, short-term interest rates will likely fall, but long-term rates might rise. Equities are unlikely to revisit the frothy heights of 2021 and market breadth should widen. As cyclical inflation subsides, structural price pressures driven by reglobalisation and the energy transition will collide with the deflationary force of AI. The backdrop for investing will require investors to identify how the outlook today intersects with our experiences of the past and where it differs. This time is different because every time is different. - Ronald Temple, Lazard. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum

What a difference a year makes. In February 2023, investors were preoccupied by the risks of rising inflation, monetary tightening and recession. This year, the focus is on disinflation, monetary easing and economic growth. The US economy remains resilient, and the Federal Reserve will likely ease policy in 2024 as inflation declines. The European Central Bank will also cut rates, boosting eurozone growth in the second half of the year. The outlook is more challenging in China, where the economy remains hindered by structural problems in the property sector. However, the generally bullish macro backdrop favours equities over fixed income. Portfolio construction practitioners should not let heightened geopolitical risks cloud what is otherwise a positive outlook for markets. - Ronald Temple, Lazard on Portfolio Construction Forum

Changes in central bank thinking, higher inflation volatility, and a reversal of the global savings glut are creating an investment environment like that of the pre-Global Financial Crisis period – in which interest rates remain higher for longer and central banks make more frequent policy adjustments, to keep inflation under control. In such an environment, bonds will offer higher levels of both income and diversification, within a multi-asset portfolio. - Chris Iggo, AXA Investment Managers. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum

Investors spend too much time trying to predict the future, using history as their guide. Instead, they should focus on what is actually happening in the world, and think differently about portfolio construction. Much of current economic and markets thinking is rooted in the post-Global Financial Crisis era. Practitioners need to let go of that history and instead embrace the fact that four trends – weak population growth, deglobalisation, the end of "free money", and the decoupling of asset prices from economies – are fundamentally changing the long-term outlook for markets. - Wayne Fitzgibbon, CAS Market Insights on Portfolio Construction Forum

Contrary to wide opinion, globalisation is not "history" but is being reinvented. Since 2010, rising Chinese nationalism, the Covid pandemic, and Russia’s invasion of Ukraine helped bring an end to 30 years of hyper-globalisation. Weaponised interdependence and the derisking of global supply chains mean location matters again. Rather than relying on highly-efficient global supply chains, governments and firms must now carefully consider how they source resources and goods – whether it’s energy, semiconductors or electric vehicles – as well as risks and vulnerabilities in the US dollar financial system. For investors, a less interconnected world has significant implications for corporate capital expenditure and country allocation. - Kevin Hebner, Epoch Investment Partners. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum

When seeking exposure to the energy transition, investors typically think of wind and solar farms, and hydrogen and battery production. However, elevated interest rates increase the costs of such projects, reducing their future investment returns. By looking more deeply down the value chain, with a focus on earnings and value, the best risk/reward energy transition opportunities can be found in sectors which at first seem counterintuitive, including fossil fuel production and mining. - Brian Arcese, Foord Asset Management on Portfolio Construction Forum

As risks related to over-indebted governments, the Russia-Ukraine war and Brexit fuel instability in Europe, the opportunity set for private credit investors is growing. While many people think that investing in challenging deals, complex capital structures and distressed situations is too difficult or too risky, unravelling the complexity of European private credit can unlock attractive risk-adjusted returns. - Fabian Chrobog, NorthWall Capital on Portfolio Construction Forum

Insights from a Thrivent portfolio manager into this underappreciated segment of the market. • Learn more at thriventfunds.com • Follow us on LinkedIn • Share feedback and questions with us at podcast@thriventfunds.com • Thrivent Distributors, LLC is a member of FINRA/SIPC and a subsidiary of Thrivent, the marketing name for Thrivent Financial for Lutherans.

In most cases of macro forecasting, historical evidence (data) is and must be the starting point for arriving at a forecast. The fundamental problem with contemporary economics is that historical evidence is not only its starting point, but also its terminus. Why has economics become so data-driven? Underlying today's historicist bias was a very important theory that permeated economics in the 1970-2000 period. This was the theory of Rational Expectations developed largely at the University of Chicago under the influence of Professors Sargent and Lucas. They wanted an absolutely rigorous (mathematical) theory on which market analysis could be based. Given the mathematical difficulties in creating their theory, they had to introduce an innocent-sounding axiom widely known as "Rational Expectations". This assumption was tantamount to saying that the dynamics of the economy were "stationary". This is the statistical term for saying that its dynamics and underlying relationships do not change over time. This in turn says that the correlations unearthed via data analysis will never change. All this implied that there was absolutely no reason for investors to doubt the conclusions based upon historical data for the best theory available said that structural changes in effect did not exist. But the fact that structural changes do exist and that historical data are often of limited relevance presents a major opportunity for investors seeking to outperform others. We can develop superior inferences about the future by using historical data as a starting point, and then incorporating new theories as to how ongoing structural changes will alter forecasts based upon historical data. To arrive at superior macro forecasts, these theories must be causal in nature. Unless they are causal, they cannot explain why historically-based theories will fall short. Another way of saying this is that investors seeking higher returns from better forecasts must think their way to such forecasts. - Dr Woody Brock, SED on Portfolio Construction Forum

The Investing Roundtable explored key challenges and opportunities in multi-asset, multi-manager portfolio construction that practitioners should be thinking about, given they can do anything, but not everything! Our research analysts each articulated a challenge or opportunity related to researching and identifying quality investment management solutions that they believe portfolio construction practitioners should be thinking about when building quality multi-asset, multi-manager portfolios:  If you do anything, consider an allocation to global small cap equities; If you do anything, use returns-based style analysis; and, Don't generalise, it's time to optimise portfolios. - Bronwen Moncrieff, John Laver, Michael Furey and Naomi Finnigan. Earn 0.75 CE/CPD hrs on Portfolio Construction Forum

Why does our industry exist, why do we as industry professionals get up in the morning, how often do you speak with your clients, what about the actual end-client? As professionals we need to stand with our clients and share our voice to ensure risk-aware approaches – and the ability to provide security to our clients' investment journeys – remains part of our investment landscape. We must whole-heartedly embrace risk AND return multi-asset portfolio construction. - Anthony Golowenko, MLC Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum

Anyone prognosticating on the future has likely heard the cliches "even a broken clock is right twice a day" and "every now and then a blind squirrel will find a nut". The primary criticism directed at those who think about the future is that it's an act of futility. The blunt reality is that accuracy cannot and should not be the criterion upon which to evaluate thinking about the future. Usefulness is a far better standard. Mechanical as it may be, thinking about various scenarios of how the future may unfold has proven to be among the most useful ways to make decisions amidst radical uncertainty. - Vikram Mansharamani. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum

Private Equity funds are impressive and have great marketing. It would be great if we could "invest in everything", but that is not feasible. Fund selection has massive alpha potential, but it is hard, and only ever investing in top quartile funds over time is virtually impossible. Private Equity pooled returns (weighted average) have historically been attractive, while also less volatile than investing in a single fund or fund-of-funds. A lower cost, efficient and scalable approach to investing, effectively allowing investors to "buy the private market" would be easier and better. An investible index of private market funds would deliver this and complement investors' portfolios in many ways, just like in public markets. - Edward Talmor-Gera, NewVest. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum

The median Australian small cap manager has outperformed the ASX Small Ordinaries consistently over the long term. Persistent operational and valuation leverage along with differentiated investment approaches creates this ongoing alpha opportunity. Small Caps have underperformed large cap peers in recent times however cyclical factors today and a rebound in domestic risk sets up for the reemergence in Australian Smalls. - David Aylward, Tribeca Investment Partners. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum

While global markets in 2023 have been led by a narrow group of mega-cap stocks, global small caps may be rewarded by the markets going forward supported by faster expected earnings growth and compelling valuations relative to large cap equities. The size and dynamism of the universe allows managers to identify a broad array of small cap companies across geographies and industries with improving company fundamentals and scope for multiple expansion. Stock selection and prudent portfolio diversification, however, are critical as investing in small caps translates to both greater opportunity and risk. - Trevor Gurwich, American Century Investments. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum

The unique characteristics of private debt make it ideal for any portfolio. It is a versatile asset class that fits in either the defensive or growth component of an investment strategy – or even both at the same time. It can provide a strong hedge against inflation, increase a portfolio’s total return and decrease overall risk. Funds that hold lower risk positions in senior secured or investment grade debt may be a suitable alternative to traditional bonds. Alternatively, funds with exposure to sub-investment grade debt or alternative parts of the capital structure can replace part of an allocation to equities. Either way, private debt's low correlation with other asset classes means it really can give investors just about everything across a full economic cycle. - Andrew Lockhart, Metrics Credit Partners. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum

Every day, every one of us is touched by infrastructure and, the longer we live, the more billions of us there are, and the more we need infrastructure. Driven by a number of macro themes, over the next 17 years to 2040, experts predict we need to invest US$94 trillion in infrastructure just to keep pace with our human needs. This investment has benefits to people and communities everywhere. Demand for essential infrastructure offers opportunities for investors to generate a steady reliable income with inflation protection built in and includes mitigants to a rising interest rate environment. In today’s world of uncertainty and volatility, one thing that is certain is the ‘essential’ role infrastructure plays in investment portfolios. If you do anything, include infrastructure in portfolios. - Michael Bessell, Dexus. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum

The transition a net zero emission economy offers risks and opportunities for investors. Investors are increasingly seeking to invest in the resource companies and manufacturers whose products are required to enable the world to transition to cleaner energy sources while avoiding businesses with high emissions, due to concerns about asset stranding risk. Infrastructure companies provide access to energy, water and transport - as they always have done - and are generally not viewed as exciting energy transition opportunities. Furthermore, infrastructure screens as high emissions. However, infrastructure sectors are major beneficiaries of the transition and concerns about asset stranding risk are misplaced. Infrastructure is a simple way to benefit from the transition to a net zero emission economy and represents a multi-decade growth opportunity.
 - Gerald Stack, Magellan Asset Management. Earn 0.50 CE/CPD hrs on Portfolio Construction Forum

We are living in the middle of a major societal shift towards not just the usage of, but the reliance, dependence and advancement of our lives being built on technology that seeks to emulate us, mimic us and envelope us. We often talk about human invention through the lens of the industrial revolutions - the first, mechanisation through steam and coal; the second, automation and mass production through electricity; and, the third, computer, automation and systems of record/engagement. We are in a new revolution, the fourth age, systems of intelligence and the AI revolution. - Tidal Ventures' Grant McCarthy and Microsoft's Shane Baldacchino. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum

AI has been described as a lever for detaching economic growth from population growth – as important as the steam engine. AI is the latest tool in a wave of disruption that is rolling through all global industries, at a pace that is quickening. Companies that don’t use the cutting-edge tools – like AI - to remake their business, as did Amazon, Netflix and eventually Disney, simply don’t have a place in today’s portfolios, whether index or not, because technology is slashing their useful lives, causing them to derate and increasing their cost of capital. - Alex Pollak, Loftus Peak. Earn 0.25 CE/CPD hrs on Portfolio Construction Forum