- Managing investment risk
- Dynamic portfolio management
- Seeking alpha
- Sustainable Investing
Managing investment risk
In 2016, we expect that returns will be lower than average and volatility higher than average. This is a market that can be very difficult to invest in as meeting your target returns may become more challenging. Some investors will seek to invest in riskier assets, in search of reaching their target returns. However, this also increases the risk of the probability, frequency and magnitude of negative returns. It is important that FP organisations understand investing in assets that are expected to provide higher returns comes with higher risks (market risk, credit risk, illiquidity risk, etc). This tradeoff is a difficult one and identifying an FP organisation’s risk appetite is very important when you are looking to increase ths risk in a portfolio. It is important that directors are equipped with the tools to monitor and manage the risks in their portfolios.
Dynamic portfolio management
The ability to manage portfolios dynamically, shifting allocations to respond to major events or expected changes to markets, is critically important. We have witnessed rapid moves in the market in recent years and we expect such trends to continue. Issues such as interest rate volatility, currency movements and falling oil prices impact portfolios in a myriad of ways; managing portfolios dynamically with a keen awareness of the market should provide organisations with the ability to get the most out of their investment portfolios in order to be best positioned to achieve their objectives.
In the expected low-return market environment of 2016, return from beta (i.e. market returns via passive strategies) will probably not be enough for most FP investors; identifying active strategies with the ability to produce alpha will be necessary. Attractive investment opportunities across asset classes and strategies will be imperative. For example, within fixed income, it may be beneficial to consider allocations to high yield credit or to seek global equity strategies which provide opportunities to invest in Japan and Europe, where we see that there should be more alpha opportunities.
Sustainable investing (we use this term in the broadest sense covering a wide range of strategies including ESG – environmental, social and governance, impact investing and screening) continues to be a dominant topic of discussion amongst organisations globally. Drivers for this are varied: from growing regulatory guidance, to stakeholder engagement, to better access and knowledge in understanding issues such as ESG and the growing focus on environmental issues; FP directors are demanding to understand how best to approach sustainable investing. In 2016, we expect further focus on this area whether it is on understanding how ESG is being incorporated into portfolios or how best to incorporate strategies such as impact investing in an investment program, the need to have a framework for addressing the topic of sustainable investing will be imperative for many FP boards.