Perspectives Blog

Does a perfect policy portfolio exist?

Jeffrey Knight, CFA, Global Head of Investment Solutions and Asset Allocation | May 5, 2014

…cy portfolio that can withstand any market conditions. So is it the perfect policy portfolio? We don’t think so. Risk Parity has contributed two breakthrough ideas to the practice of asset allocation. The first is the technique of measuring risk allocation as opposed to capital allocation. For example, a portfolio with 60% of its assets in equities and 40% of its assets in bonds might seem balanced, but in risk allocation terms it is anything but…

The end of “risk-on/risk-off”

Anwiti Bahuguna, Ph.D., Senior Portfolio Manager | February 3, 2014

…ducing the benefits of cross-regional diversification. Similarly, correlation between equities and high yielding bonds rose from about 50% to over 80%. When investors took risk, most assets rallied with the exception of sovereign bonds. Conversely, when risk sold off, only sovereign bonds had positive returns. This risk-on/risk-off regime posed a problem for multi-asset portfolios as many of the traditional diversifiers of equities increasingly b…

A port in the storm — Short muni funds can offer refuge in the face of rising rates

Catherine Stienstra, Senior Portfolio Manager | October 2, 2014

…ssuers may necessitate the fund investing more heavily in a single issuer and, therefore, be more exposed to the risk of loss than a fund that invests more broadly. Prepayment and extension risk exists as a loan, bond or other investment may be called, prepaid or redeemed before maturity and that similar yielding investments may not be available for purchase. Market risk may affect a single issuer, sector of the economy, industry or the market as…

Trouble in paradise: Q&A about Puerto Rico bonds

Chad Farrington, CFA, Head of Municipal Bond Credit Research and Senior Portfolio Manager | January 2, 2014

…local) had been a big lure for many institutional investors, such as mutual funds. PR debt exposure in municipal bond funds, namely single-state municipal bond funds, proved advantageous for shareholders — that is until Puerto Rico debt started trading more in line with its weak fundamental credit characteristics. Since late summer 2013, municipal bonds issued by Puerto Rico have lost more than 20% of their value, with more downside risk possible…

Constraints of convention – Does a portfolio design have to be static?

Jeffrey Knight, CFA, Global Head of Investment Solutions and Asset Allocation | July 14, 2014

A 60/40 portfolio may appear to be balanced, but when viewed through a risk lens it is clear that the equity allocation comprises a disproportionate amount of the risk. As a static strategy, the very thing that has helped risk parity succeed over time may prove to be its biggest liability going forward, and that is all those extra bonds. Instead of always being accountable to the same neutral portfolio, why not shift accountability to a startin…

Interpreting the bond rally from a multi-asset perspective

Jeffrey Knight, CFA, Global Head of Investment Solutions and Asset Allocation | June 2, 2014

…ework for identifying capital market states can help set expectations for markets in the aftermath of the recent bond rally. Our framework suggests a highly bullish market state for equities although that market state would shift to bearish if conditions became more neutral. While we expect ongoing strength in equities (which should pressure bond markets and drive yields higher), the durability of strong performance in risk asset markets will be…

The case for active bond management

Carl Pappo, Head of Core Fixed Income | August 25, 2014

There have been instances where the passive approach to bond investing produced significant underperformance relative to a benchmark. Index funds are at a significant disadvantage to active portfolios in which managers incorporate valuation into their decision making process. The many nuances and inefficiencies of the fixed income market create both difficulties for indexing and opportunities for active management. Co-authored by Michael W. Za…