Risk Management

With Harry Markowitz came the advent of modern portfolio theory in the 1950s and the use of mean variance optimisation, which effectively combined the concept of diversification with risk management, giving investors a more scientific way to determine their asset allocation. This began the standard balanced portfolio of 60% stocks and 40% bonds, or a 60/40 balanced portfolio. While history has shown an improvement over a static allocation to one asset class, this approach has often fallen short, particularly over short to medium time horizons because markets deliver returns unevenly through the business cycle.

To address the issue of timing, multi-asset investing has evolved to incorporate both longer-term asset allocation shifts (often referred to as Strategic Asset Allocation) and shorter-term asset allocation changes (often referred to as Dynamic Asset Allocation). Flexibility to rotate into and out of asset classes means that a skilled investor can achieve both increased returns and reduced risk.

This involves balancing factors, exposures, risks, correlations and thematic thinking over an entire portfolio. Every idea is tested in its risk-return impact to the portfolio. This ‘one portfolio’ approach offers a unique oversight into true risk exposures, while also allowing investors to have impact with thematic positions.

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