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Russell Investments Communiqué
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Megan Roach
Keith Brakebill
Q&A
Dynamic portfolio management
With: Megan Roach, CFA, Portfolio Manager
and Keith Brakebill, CFA, Senior Portfolio Manager
Q1: RUSSELL INVESTMENTS HAS BEENMANAGING PORTFOLIOS FOR
OVER 35 YEARS. HOWMUCHMORE DYNAMIC IS THAT PROCESS TODAY
THAN IN THE PAST?
Megan (M)
We are much more hands-on in our approach today. With the monitoring
systems that now exist, and so many opportunities to adjust exposures, we’re able to
directly manage portfolio positioning more precisely than ever, whether it’s factors,
countries, sectors, industries or currencies. Behind this is the recognition that, in a low-
return environment, investors cannot afford to ignore opportunities to improve returns,
however incremental, and we cannot afford to take risks that we don’t expect to be
compensated for. Our dynamic positioning is designed both to add incremental returns
and to manage unwanted risks that we don’t expect to get paid for.
Keith (K)
Yes. As a fixed-income manager, for example, there’s nothing that says
“opportunity for dynamic management” to me quite like the history of high yield bond
spreads. When that spread over Treasuries moves out to extremes, we cannot be sure
how far it will go, but we can be confident that it won’t stay there for too long. Until the
past few years, we had limited means of acting on that signal, but we can be much more
nimble today.
Q2. WHAT ARE THE INPUTS YOU TAKE INTO ACCOUNT IN YOUR
DYNAMIC POSITIONING?
(M)
We try to gather information from a wide range of sources to ensure we get as
full a picture as possible. There are five main inputs (see figure 1). Some of these are
quantitative, and some are qualitative. At different points in time, some become more
important than others. When two or three of the inputs align with a similar indication of
opportunity or risk, we would consider this a meaningful signal for potential action.
Q3. COULD YOU RUN US THROUGH AN EXAMPLE OF HOW THIS WORKS
IN PRACTICE?
(K)
Credit is a good example. That’s an exposure where we hold a clear strategic belief:
We believe credit exposure is systematically rewarded. But that exposure was de-
emphasized for a period as valuations became unattractive. Then, over 2015 and into
2016, the signals became more positive. Our strategist team started to see this area as
attractive, and we became more confident that there would be back-stop purchasers of
our positions if we needed them. And then signals from our sub-advisors (the external
money managers we use) were also positive. So, we started to add exposure to credit.
STRATEGY
TIMING
IMPLEMENTATION