...that macro is due a come-back in the intellectual and economic community. The world is too complicated for analysis...synthesis must also be included in the investment process. Simple questions like "how will the world look in 5/10/15 years?" makes one appreciate the vast number of variables involved.
By Rodney N Sullivan, CFA
What are the most profound changes likely to be as the investment management business regroups from the recent global financial crisis and moves forward into the future?
In a session Sunday at the 10th Annual Research for the Practitioner Workshop immediately preceding the start of the 64th CFA Institute Annual Conference in Edinburgh, Scotland, Sergio Focardi, professor of finance at EDHEC Business School, outlined many key shifts. He observed that recent global events have highlighted the need for a better alignment of expectations with the overall ability of economies to generate returns. As such, a top-down approach in which macroeconomics plays a much bigger role has moved to the fore, Professor Focardi argued. Investors are also paying more attention to other tensions such as liquidity risk, counterparty risk, systemic risk, and the effects of leverage.
With this evolution in thinking, Professor Focardi explained, asset allocation is becoming more dynamic, even though investors may not be fully embracing tactical asset allocation per se.
Following this move toward a more dynamic asset allocation is an expansion of the universe of investable asset classes. Portfolio diversity matters—and portfolio construction is expanding beyond stocks, bonds, cash, and real estate. Other asset classes being integrated into investment portfolios include currencies, natural resources, precious metals, private equity, infrastructure, and even intangible investments such as intellectual property rights.
Finally, Professor Focardi noted that new risk management methods are emerging in response to the financial crisis. Consider how the analysis of trends can help investors achieve better diversification and manage risk more effectively. Including the evolution of selected macroeconomic variables in the modeling of trend reversals (e.g., regime shifting models) that characterize crises can be used to improve portfolio outcomes.