Gyongyi King, is the Chief Investment Officer at Alexforbes
In today’s rapidly changing investment landscape, traditional sources of return are under pressure. To generate real returns, institutional investors must adapt their asset allocation models. This article explores the evolving investment environment and provides insights on how to future-fit asset allocation strategies to achieve sustainable growth.
The Swiss Army knife
Think of the Swiss Army knife, a reliable, multi-purpose tool that has evolved over time to meet the demands of different users. Just as the Swiss Army knife has added new tools to remain ver-satile and effective, our asset allocation strategies must also evolve to navigate the complexities of the current market landscape. This metaphor helps us visualise the importance of diversifica-tion, strategic planning and adaptability in investment strategies.
The paradigm shift
The pressures and challenges brought about by evolving markets, changing regulations and the introduction of innovative solutions have greatly shifted the agility and diversification requirements of portfolios. Meeting long-term liabilities is becoming more complex and demanding. The tradi-tional 60/40 equity/bond allocation, which provided considerable diversification benefits in the past, now requires a paradigm shift. Institutional investors must consider different portfolio com-positions to achieve risk-adjusted returns.
Embracing alternative investments
Given the higher correlations between equities and bonds, it is worthwhile to explore alternative investment strategies, such as private markets and hedge funds. These alternatives provide di-versification benefits by exhibiting low-to-negative correlation with traditional investments, helping to dampen portfolio volatility. Adding a sleeve of alternative investments to a public market portfo-lio can enhance returns and minimise volatility. Institutional investors should consider dedicating a sensible allocation to alternatives to achieve the desired risk/return benefits.
The importance of global diversification
The JSE is shrinking as a broad opportunity set for pension funds, with the number of listed com-panies decreasing significantly over the years. Additionally, the maximum offshore allocation for South African retirement funds was increased to 45% in February 2022. Going global not only gives local investors access to broader opportunity sets across countries and markets but also helps protect investments against short-term currency movements and inflation. Institutional inves-tors should consider their goals and risk profiles when determining the extent of their offshore in-vestments.
A case study: The Alexforbes Investments Performer portfolio
Our flagship portfolio, Performer, embodies the principles of the Swiss Army knife approach. Each asset allocation component is thoughtfully selected to achieve our investment objectives. For in-stance, our allocation to multi-asset balanced building blocks provides flexibility in asset alloca-tion, essential for capturing opportunities and managing risks effectively across various asset classes. Allocations to developed and emerging market equities capture attractive risk-adjusted returns and high-growth opportunities, respectively. Additionally, our exposure to private markets and hedge funds leverages unique tools to maximise the risk-return balance for investors.
Lessons learned: A perspective from South Africa’s largest multi-manager
Through our journey of future-fitting asset allocations, we have learned several key lessons:
1. Thorough research and due diligence are essential to identify high-quality asset manag-ers and investment opportunities. This process involves evaluating management teams, strategies, track records and investment pipelines in detail.
2. Gaining and maintaining access to high-quality asset managers is crucial. The dispersion in returns between the best and worst managers in private markets and hedge funds un-derscores the importance of selecting the right managers. Accessing the best managers at the right price is key to long-term return generation.
3. How you access niche asset classes is as important as the investment itself. Strong gov-ernance and legal structures are necessary to ensure the integrity and viability of invest-ments. This includes establishing clear guidelines and oversight mechanisms to manage risks effectively.
4. Fees and bargaining power reflect long-standing frictions for portfolio adaptability. Scale is not just about size and bargaining power; it’s about expertise. Partnering with strong in-vestment providers can help save time and money, providing better value for money when future-fitting asset allocations.
5. Monitoring and measuring alignment with ESG principles and tangible impact created is increasingly important. ESG reporting fosters trust and transparency, empowering asset owners and managers to identify, assess and navigate risks while seizing opportunities.
The survival kit for future-fitting asset allocation
To navigate the complexities of transitioning from low governance strategies to high governance portfolios, we propose a “survival kit” based on our extensive experience. This kit includes:
• Compass-Clear vision and well-defined goals are essential for strategic direction, ensuring asset allocation decisions align with long-term objectives.
• Flashlight-thorough research and evaluation of investment opportunities and risks are crucial. Building strong networks with industry experts provides valuable insights and sup-port.
• Water Purifier-Conducting due diligence ensures investment quality and viability.
• First Aid Kit-Adhering to regulatory requirements ensures legal and ethical standards. Continuous education and training equip investors with necessary knowledge and skills. Maintaining liquidity allows funds to meet obligations and seize opportunities.
By incorporating these elements, institutional investors can build real investment value into the future with confidence and success.