The key to constructing investment portfolios with resilience to rapid and unexpected changes is to remain humble, interrogate the data, and not be fooled into thinking the future can be predicted perfectly, according to head of multi-asset strategy APAC for Wellington, Nick Samouilhan.

In the midst of the COVID-19 pandemic, Singapore-based Wellington Management managing director and head of multi-asset strategy APAC Nick Samouilhan says “his team decided to take a step back and think about what was going on”.

Samouilhan told the 2024 Fiduciary Investors Symposium in Singapore last week that their aim was to analyse whether it could take what was happening in the moment and “try and work out the next five to 10 years – not trying to be too prescriptive, but can we directionally try and understand some of the big changes, which we think will really matter over the next, say, five to 10 years”.

Samouilhan said the multi-asset strategy team have identified four key themes that continue to hold true today.

“It was clear three years ago, [and] it is absolutely clear today, that governments all over the world are potentially going to be far more activist in determining winners and losers and directing capital,” he said.

“And it means that when we invest in a company, that company’s outcome may not be about shareholder maximisation, it may be something else, we need to realise that and address that.”

Samouilhan said it was “clear back then [and] it’s clear now that climate is an increasingly important consideration in driving risk and return in capital allocation.

“We need to address that in our portfolios,” he said.

“What we were seeing back then and, again, we’re also seeing that now, [is] governments all over the world focus on their own economies, their own objectives.

“Because of that, we’re starting to see policy cycles, interest rate cycles, economic cycles, regulatory cycles start to diverge. And that has an increasingly important impact on say, regional allocations, and currencies, and so on.”

This analysis prompted a discussion between Samouilhan’s  multi-asset team and the macro team because it led them to believe that “something’s going on, beneath the surface on the macro economy” – and it might be that the principles of investing and portfolio construction that have served investors well in the recent past might not be appropriate in future.

Building portfolios with resilience requires that possibility to be taken into account, and Samouilhan said investors should bear in mind three things when considering how to build resiliency into portfolios.

“First, you should expand the number of asset classes in your portfolio,” he said.

 “For instance, there was long discussion yesterday about commodities and how the allocations have generally disappointed over the last decade.  But that is because we haven’t spent time in regimes when commodities are helpful.”

Samouilhan explains the second point: if we are in this world where beta is challenged, we need to really look at how are we going to meet return expectations, if beta doesn’t get us there,” he said.

“That might mean alternative ways of getting different returns – hedge funds, and so on. It may mean more skill-based approaches; it may mean more privates. If we can’t rely purely on beta, because the world is slightly different, we need another engine to drive the returns.”

Samouilhan said the final point is that “once you’ve allocated to different asset classes, perhaps we can be a bit more thoughtful on how these asset classes are expressed”.

“For instance, in hedge funds, if we are in this world that’s tougher, maybe ’leaning towards long-short strategies that can potentially discriminate between good and bad companies, where that difference will start to matter.

Can we be better at the expression on the equity side? Do we lean to things like quality, because that tends to do much better in certain regimes?”

Samouilhan said that all of that means that “if we are going into a slightly different world – and perhaps we’re leaving an anomalous world, maybe the world we’ve just lived in is the weirdness and we’re going back to a more normal world – we do need to look at some important things in the portfolio: correlations; the construction of the portfolio, reliance on beta and perhaps the expression; and how we do risk management.”

Samouilhan said the key to success for investors for the coming year was to “be humble”.

“It’s to interrogate the data, to think long and hard, but not to think we can guess the future correctly,” he said.

“Say we’re five years from now, and our expectations on the macro economy proved incorrect. It would not be the first time; I would not be embarrassed by that.  If it is completely wrong, I think looking back what we would have missed was this: perhaps most of the inflation we’ve seen recently was entirely cyclical, and COVID-related, and that will wash out of the system; and that all this talk about regionalisation of supply chains is only marginal, and countries continue to trade with each other.”

Samouilhan said it’s also possible that developments in AI could “offset many of the issues around constrained supply”.

“So perhaps inflation goes back to being a non-issue,” he said.

“And, if and if that’s the case, most of what I’ve just said goes away, because central banks then don’t need to worry about re-inflating the economy, because they just can’t, because there’s no inflation.

“We do need to question whether that’s right. This is just a nice, helpful thing to say – well, maybe the last few decades were the anomalous period, and we’re going back to a more normal period. What does that more normal period look like?”

Bridgewater Associates has a house view that the world is moving into a period of macro-volatility and global conflict, following a half-century period of relative harmony and pro-growth market conditions. But despite the myriad geopolitical and environmental risks facing investors, Bridgewater senior portfolio strategist Atul Lele says it is investors’ unwillingness to break with the model portfolios of the past that presents the greatest threat to institutional portfolios.  

Opening the Fiduciary Investors Symposium in Singapore earlier this month, Bridgewater Associates senior portfolio strategist Atul Lele argued investors had entered an “environment of great secular change”.

Echoing sentiments made by Bridgewater co-CIO Greg Jensen late last year, Lele argued that many of the pro-growth and disinflationary forces that had been advantageous to investment returns over the past half century were starting to subside, as deglobalisation is replaced by regionalisation and governments and labour unions regain strength after decades of deregulation.

Then, there are the additional and emerging challenges presented by climate change and artificial intelligence, he said.

“For the better part of 40 years you’ve seen secular disinflation as globalisation led to a decline in cost structures,” Lele said.

“As we fast forward to today, almost all of these secular disinflationary pressures are now fading – globalisation is turning to regionalisation, de-unionisation is returning to re-unionisation and income tax rates are rising across the OECD.”

But while these shifting macro conditions present financial – and in some cases, physical – risks to institutional portfolios, the greatest threat is posed by investors’ own unwillingness to respond to them, Lele argued.

He described the continued adherence to traditional 70:30 portfolios, in spite of the shifting macroeconomic reality, as the “biggest risk we see around the world”.

“When we look at the performance of most traditional 70:30 portfolios, they’ve just had their best decade ever. And most investors we see are still anchored to this portfolio or some variant of it. Yet today, the pro-corporate , pro-liquidity, pro-global harmony disinflationary winds that have been around for the past 50 years are now fading,” he said.

“When we look at all the drivers of portfolio outcomes – growth, inflation, policy, geopolitics, globalisation, the corporate environment, the energy backdrop, technology – all of these are shifting very, very rapidly.

“And so the question for investors is how to deal with it and that turns to the idea of portfolio resiliency. The answer isn’t just to dump equities, the answer is to think very seriously about how to make portfolios more resilient.”

Pulling the right lever

He urged the audience – which included 65 institutional asset owners from 15 countries – to determine their own definition of what portfolio resiliency meant to them. But he also offered Bridgewater’s definition that resilience refers to the ability to achieve target returns across the wide range of risky and shifting scenarios investors face.

Lele posited four specific elements of resiliency: narrowing the range of possible outcomes by mitigating risk; reducing the severity of tail-risk outcomes; reducing the likelihood of sustained periods of under-performance and raising the average return across different economic environments.

Given Bridgewater’s thesis that investors are facing an increasingly complex and fraught environment, Lele made the point that not all tail-risks can be mitigated. Institutional investors will therefore need to prioritise between vulnerabilities based on their objectives, values and those of their stakeholders.

“Then they need to pull levers,” he said. “Such as big portfolio shifts – moving out of equities to bonds for example, or shifting into infrastructure for inflation protection — or more tactical such as following trend-following strategies and tail risk hedging strategies and so on. It’s important investors think about the full range of levers available to them.”

Another key risk identified was benchmark allocations to Asian markets, which dramatically under-value the growing independence and importance of Asia in the global economy. He said investors should consider an “intentional shift” to Asian markets, revealing that Bridgewater’s portfolio allocation was in the realm of 15 to 20 per cent.

“Geographic diversification is absolutely top of mind for us,” Lele said. “Most investors are disproportionately invested in US and Europe.

“[Asian exposure is] hugely diversifying to portfolios …[and] hugely supportive of sharp ratios.”