Portfolio Construction for Navigating a New World of Risk

Establishing an appropriate asset allocation and staying invested in the markets is fundamental to successful investing. But market volatility can unnerve the most seasoned of investors, causing them to abandon their plans and jeopardize their long-term investment goals.

In today’s low-growth and low-return environment, investors are increasingly seeking solutions that will maximize their returns while minimizing their risk exposure. Alpha opportunities exist in every asset class; they’re not the only route to market-beating returns. What’s more, the traditional approach to portfolio construction is outdated – no longer simply a matter of selecting stocks and bonds and determining their allocation – and it’s time for investors to stop thinking in ‘active versus passive’ terms. 

In today’s developing market, there are so many new opportunities as technology exposes more are more client segments to exciting asset classes, that we were once the playing field for large institutions and ultra-high net worth families. 

So, when planning for medium to long-term investments where should we look? 

Optimizing ESG Investments in Our Portfolio

Sustainable investing has become one of the biggest trends in recent years. Once considered a specialist strategy, in 2022 ESG is now the new normal. Investors expect to generate sustainable returns across multi-asset portfolios. They also expect not just a portion of these investments but most of their portfolio, to positively impact the community and the environment.

Where money flows, regulation follows. By 2022, The EU’s Sustainable Finance Disclosure Regulation (SFDR), will put in place new reporting frameworks to help the sector tackle reporting gaps, creating a level playing field and greater transparency.

The Rise of The Fintech

The impact of bank regulation, FATCA, and AML (Anti Money Laundering) directives, has created a situation where clients are very frustrated with the institutions that have traditionally been overcharging for services and underdelivering. 

This has created a void for young professional entrepreneurs to create alternative solutions for trading, managing money, lending, and almost every function that was traditionally a monopoly of the banks. 

In 2022, some of the sector’s largest asset managers have already begun launching innovation hubs and incubators, resulting in technology arms that can potentially be spun off as separate businesses in the fintech arena. 

Having gotten through the first wave of fintech mania that took on successfully the giants in the industry, they have proven that technology and open software can deliver long-term benefits for the industry and for clients.

Taking the Risk Out of Human Capital

Digitization and automation have taken on new meaning in 2022. Artificial Intelligence systems are now able to do amazing things and save organizations time and energy in doing cumbersome work on databases. 

But rather than replacing humans, technology has addressed the vast volumes of data submerging people and processes. Firms are now empowered and able to address their human capital risk by making their employees’ roles more valuable with a greater focus on upskilling.

And with employees no longer confined by inherited technical debt and highly customized Excel spreadsheets, talent is once again invigorated. Asset managers are combining their resources’ knowledge and skills on alpha-generating tasks, together with newer technologies they can now adopt, to create value, drive growth, and secure business continuity.

More than anything, in 2022 asset management employees feel they’re making a difference. They are no longer just ‘keeping the lights on and are now working with purpose, to make the world better. 

Turning up The Volume of Private Market Assets

In 2022, institutional investors had already put hefty capital to work in private market assets, seeking higher returns from under-researched asset classes. According to PEI data, total private markets fundraising – for private equity, private debt, real estate, and infrastructure – had leaped from $357B in 2009 to $1.2 Trillion in 2021. If this growth continues, as inflation pushes stock prices lower and asset owners increase allocations this asset class could double again in three years.

The Future of Investment Management

In 2022, we see investors going direct to market, bypassing traditional financial constructs, including asset managers themselves. In the future, direct indexing will have taken off, with Gen Z and millennial investors proving to be far savvier on investment strategies such as ESG and Private Equity.

In response, asset managers have introduced a range of products to attract investors and expose them to asset classes they could never afford to be exposed to but with this comes the challenge of working on new innovative structures and managing them efficiently. 

At the same time, cryptocurrencies have also gained momentum with thousands of transactions daily. And while newer more stable digital currencies have come to market, since Bitcoin and Ethereum, there is a feeling that the future is efficient global currencies that allow companies and global families to trade globally without currency restrictions. 

Professionals Will Need to Work Together as a Community To Move From Surviving to Thriving

The journey into the future starts here and now. To reach this end game and achieve the operational change described, professionals will need to work together as a community, leveraging gains across the investment ecosystem. Only then will asset managers move from surviving to thriving.

About the Author
Dan Dobry was the founder and a director of the GlobalNET Investment House, he was one of the founders of the Union of Financial Planners in Israel (UFPI) and served as the first Chairman and President of UFPI. Dan was the Global Council Representative for Israel for the Global Community (FPSB) from 2012 - 2018 and was a member of the Committee for Standards and Qualifications for the European Union (SQC) until December 2021.
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