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The five characteristics of a future portfolio: CAIA

The traditional 60/40 portfolio allocation is no longer enough. The opportunity for alpha is not gone, but the low-hanging fruit has long been harvested, and the path toward higher absolute returns has gotten far more nuanced. Today, five distinct marks define the ‘Portfolio of the Future,’ according to a new report from the Chartered Alternative Investment Analyst (CAIA) Association, the professional body for the global alternative investment industry.

Five investment experts including Commonfund’s Mark Anson, Thinking Ahead Institute’s Roger Urwin and Franklin Templeton’s Anne Simpson explain more.

Broadly Diversified

Mark Anson, CEO and CIO of Commonfund, the pioneer of outsourced CIO services for non-profits, argues that responsible portfolio management consists of collating a series of uncorrelated beta and risk premia that offers a combination of income, inflation protection, capital preservation, and principal growth to meet a required return.

During recent years the unlikely narrative has been heralded that financial assets, particularly public equities, eternally march upward. The proliferation of new, low-cost products has created complacency and “beta creep.” As such, fiduciaries must be more creative in expanding their investment opportunity set. That begins with a return of the foundational principle of diversification across asset classes, geography, sector, and purpose.

Less Liquid

The traditional 60/40 public equities and fixed income allocation has provided extraordinarily well in the last decade. But Andrea Auerbach, Cambridge Associates global head of private investments, counsels not to take solace in the recent past. Investment professionals will have to look to differentiated sources of return, notably private capital, to increase the potential of being able to fully meet their obligations with responsible control of risk.

Private capital has become increasingly attractive for earlier stage, new economy, and growth companies. And, because private capital is detached from the short-term machinations of public markets, it liberates investors to take advantage of market dislocations, information asymmetry, and out-of-favour or countercyclical opportunities. Avoiding private capital in a portfolio denies access for clients to an increasingly large portion of the global economy. Still, private markets are not a silver bullet given their opacity, high fees, need for patience, and wide risk-return dispersion. They must be carefully considered in light of client liquidity, income needs, and risk tolerance. Extensive due diligence and thoughtful, deliberate manager selection is imperative.

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Fiduciary Mindset

Investment management is an agency business. Asset managers exist to deliver trust, care, and expertise to clients. Roger Urwin, global head of content at the Thinking Ahead Institute, explains how a fiduciary mindset begins with an existential understanding of purpose, alignment, and service to the client. “Systems leaders” are responsible for translating these values into behavioural norms that influence ownership structure, client communication, compensation, fees, talent recruiting, culture, and definition of success (benchmarks). The investment profession—and each client’s Portfolio for the Future —still has work to do on this journey through mitigating conflicts of interest, asymmetric payoffs, incentive dislocations between limited partners (LP) and general partners (GP), and unnecessary financial engineering

Actively Engaged

The age of the universal owner has arrived. Clients are demanding both positive financial and social outcomes from their capital allocation and underlying holdings. No one knows this better than Anne Simpson, global head of sustainability, Franklin Templeton and former managing investment director of board governance & sustainability, CalPERS. With a devastating global pandemic, climate consciousness, and the pursuit of clean energy alternatives at a fever pitch, investment professionals are integrating sustainability elements such as carbon footprint, progress on diversity, equity and inclusion (DEI), human-rights records, and labour practices into their security evaluation, risk management, and return expectations. Further, non-financial disclosures, as well as ESG ratings, are becoming more accepted as a regular, integrated part of security analysis. The Portfolio for the Future will be much more insistent and proactive in ensuring that it contributes to a more inclusive and sustainable tomorrow.

Operational Alpha

The modern investment profession is highly competitive. New sources of comparative advantage are being cultivated among enterprising professionals, argues Ashby Monk, PhD, executive director, Stanford Research Initiative on Long Term Investing. Firm culture, governance, and technology are much more predictive of sustained performance than previously thought and should be emerging priorities for any leader. The Portfolio for the Future will be driven by firms that innovate and exploit new organizational and operational models to save cost, reduce risk, and pioneer new investment ideas.

The industry needs to be reoriented back toward a north star of sophisticated portfolio construction, one that prioritizes client and beneficiary outcomes and works tirelessly to achieve those outcomes in a long-term, sustainable way. This essential definition of professionalism will usher in a new identity of enlightened self-interest that culminates in a much-improved public warranty. The Portfolio for the Future is CAIA Association’s contribution and call to action for that transformation.


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