Key Takeaways:
- In volatile markets, without a holisitic oversight, multi-manager portfolios can unintentionally carry overlapping exposures or biases
- Understanding total portfolio positioning across sectors, regions, and factors is critical to ensuring risks are taken deliberately
- Using complementary strategies at the portfolio level helps correct misalignments without disrupting core alpha sources
In times of heightened market volatility, confidence often comes from clarity. For wealth managers invested in multi-manager portfolios, rising and falling interest rates, sector rotations, or geopolitical shocks can raise important questions on portfolio positioning.
When this happens it’s critical to ask: do you know exactly what you are exposed to?
Unintended Risks
Market shifts are inevitable, but unintended risks don’t have to be. Knowing your exposures is essential because even when a portfolio appears well-positioned on the surface, the reality underneath can be far more complex.
Wealth managers often allocate capital across multiple strategies or external managers, which can cause portfolio misalignment. This is because managers operate independently and are often unaware of each other’s holdings. While each might pursue alpha within their mandate, the aggregate portfolio may unknowingly lean toward certain sectors, regions, or factors that impact the overall portfolio performance.
For instance, a concentration in U.S. equities might be offset or amplified by another manager’s positions. Without a holistic view, wealth managers may be left in the dark about these risks until after performance is impacted.
Additionally, with allocations to multiple managers it can prove difficult to have a holistic view of how your overall exposures compare to industry benchmarks. Russell Investments’ bespoke systems help bring clarity and control in this regard. Our input can complement existing manager strategies, helping to align the total portfolio with a wealth manager’s desired risk exposures and strategic beliefs.
Staying Nimble
By incorporating derivative and security-level positions targeting specific factors, sectors, regions, or currencies, we can help:
- Fill identified exposure gaps
- Correct unintended biases
- Ensure risk is being taken deliberately, not accidentally
In volatile markets especially, having the capability to adjust exposures quickly, capture short-term opportunities, or navigate around sudden market shifts without disrupting the core alpha-generating strategies in place, can deliver real value to investors.
By managing risks at the total-portfolio level, wealth managers reduce the need for over-diversification.
For instance, by diversifying around the edges of your top manager choices, it can reduce the need to diversify with additional manager selections, which might not be as aligned with your desired portfolio positioning. Essentially, we can make it easier for investors to have high conviction in their preferred managers while still balancing market risk.
Our capabilities also free asset managers to focus on what they do best: finding alpha, while we help to maintain overall portfolio balance.
Crucially, we look to provide a truer picture of your overall portfolio positioning, letting you know where you stand during periods of uncertainty, and act accordingly. If you’re interested in knowing your exposures, don’t hesitate to get in touch. We’d love to have a conversation.
Any opinion expressed is that of Russell Investments, is not a statement of fact, is subject to change and does not constitute investment advice.