The Age of the Unexpected

Our solutions to the challenges facing investors in a time of great uncertainty.

The Environment is Changing

Hugh Prendergast

Head of Strategic Product & Marketing

Western Europe and Latin America

Since the financial crisis, monetary policy has been the stimulus of economic growth and financial market stability.

However, this era is drawing to a close and, as the incremental benefits fade and the schism between the political establishment and the electorate widens, a new unpredictable economic and political framework is emerging.

In this new Age of the Unexpected, investors are facing new opportunities but also an investment environment that is more volatile with potentially lower absolute returns.

In this environment, the risk is primarily that of not meeting one’s investment objective. Thinking of risk in these terms requires a change of the mind-set from a market-led investment approach to seeking out a more outcome-oriented approach. The aim is to identify those investment solutions (or combination thereof) best suited to meet individual investment goals, maximising the probability of achieving the desired outcome.

Investors are looking for answers to the...

5 Challenges in the Age of the Unexpected

1. From Monetary to Fiscal Policy:

Core Portfolio Modification for a Regime Change

Reflationary fiscal policy, as the catalyst for expansion, could be positive and bring sustainable growth – or bring uncertainty and volatility. A potential regime change raises many questions, first and foremost, how are core investment strategies adapting their approach to building portfolios to continue to perform in this environment?

2. How to Manage Volatility and Drawdown Risk

Without Foregoing Upside Potential?

In a low return environment, time to recovery in the event of a drawdown will get longer. This makes striving to achieve risk-adjusted returns the primary aim for investors concerned with volatility and drawdown risks. One way of improving the sharp ratio of an investment portfolio is by adding non-directional investment strategies. But how can investors include these strategies in their portfolios and what strategies should they seek out?

3. How to Build Portfolios for a Reflationary Environment?

After years of global disinflation in Developed Markets, inflation pressures are now beginning to build up. How can investors build portfolios that are resilient in this new market scenario and that can deliver upside potential and income, while defending value loss from inflation?

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4. How to Find Sustainable Income?

In a low yield environment income is difficult to find, yet the demand for income is ever increasing. Taking a more active approach, and exploring a wider range of potentially higher-yielding investment opportunities outside traditional Fixed Income, and across different asset classes with varying levels of risk, may provide a solution.

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5. How to Reduce Interest Rate Sensitivity?

With interest rates so low, even a small pick-up in inflation could potentially push bond returns into negative territory.
In this environment, taking a flexible approach in the search for an optimal yield/short duration profile in all Fixed Income segments is worth exploring in more detail for interest rate risk conscious Fixed Income investors.

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