Risk Revisited

Institutional investors ready to give up on stocks should first consider whether they should lift some of the restrictions they impose on their equity managers, as my colleague Patrick Rudden recently explained in an article for our European newsletter, Pension KnowlEDGE.

US mutual fund figures show that there has been massive switching out of equities and into bonds since 2008 as investors have attempted to de-risk their portfolios. This is likely to be a fair reflection of what has been happening with European investors too, both retail and institutional—all the more so after the turbulence of this August. Indeed, we have received numerous calls from investors asking what steps we have taken to protect portfolios from recent equity-market declines.

Our response is to ask clients to look again at their own objectives and how they are to be achieved. Their aim may still be to meet some future liability, like a pension or the needs of a charity. What may have changed is how that aim is to be met.

While markets have hardly been kind since 2000, most equity mandates placed with fund managers continue to prescribe a long-only, fully invested portfolio. It goes without saying that there is a limit to what such a portfolio can do to protect against falling equity markets.

Investment criteria that were forged in the white-hot optimism of the long bull markets of the 1980s and 1990s may not suit current circumstances. Investors who stuck with equities and are now feeling anxious about recent volatility may be signaling that they have insufficient offsetting exposures—high-quality bonds, for example. Alternatively, they may have so finely sliced and diced their portfolios among various specialists that they have lost the ability to make timely allocations among asset classes and strategies.

Instead, those investors may need to think more creatively, perhaps allowing their equity managers more discretion. One route could be to use a diversified growth fund, which might offer a more flexible and timely approach to volatility. Alternatively, perhaps they should invest in equity portfolios designed to have lower volatility.

What is clear is that many investors have thrown in the towel with equities. Yet those who have rushed into bonds may have simply guaranteed that their long-term objectives cannot be achieved.

Whatever the case, as investors revisit the management of their portfolios in the wake of the recent market turbulence, their imperative should be to take a more sophisticated approach to risk than simply fleeing to the nearest safe haven.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AllianceBernstein portfolio teams.

Seth Masters

Chief Investment Officer—Bernstein
Seth Masters is Chief Investment Officer of Bernstein. He heads the team that provides customized wealth-planning advice and manages the firm’s private client portfolios. Masters was previously CIO for Asset Allocation, overseeing the firm’s Dynamic Asset Allocation, Target Date, Target Risk and Indexed services. In June 2008, he was appointed head of AllianceBernstein’s newly formed Defined Contribution business unit, which has since become an industry leader in custom target-date and lifetime income portfolios. Masters became CIO of Blend Strategies in 2002 and launched a range of style-blended services. From 1994 to 2002, he was CIO of Emerging Markets Value Equities. He joined Bernstein in 1991 as a research analyst covering global financial firms. Masters has frequently been cited in print and appeared on television programs dealing with investment strategy. He has published numerous articles, including “The Case for the 20,000 Dow”; “Long-Horizon Investment Planning in Globally Integrated Capital Markets”; “Is There a Better Way to Rebalance?”; and “The Future of Defined Contribution Plans.” Masters worked as a senior associate at Booz, Allen & Hamilton from 1986 to 1990 and taught economics in China from 1983 to 1985. He holds an AB from Princeton University and an MPhil in economics from Oxford University. He is fluent in French and Mandarin Chinese. Location: New York

Related Posts