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You Still Need to Strengthen Portfolio Resilience

How COVID-19 will play out remains uncertain. Multi-asset strategies have the flexibility and potential to address risks as they evolve.

While U.S. stock markets have largely recovered from sharp first quarter selloffs, it remains uncertain what may lie ahead as the economic impact of the COVID-19 crisis continues to unfold. Invesco portfolio managers Scott Wolle, Chief Investment Officer, Global Asset Allocation, and David Millar, Head of Multi-Asset, discuss the current investment climate and offer insights into multi-asset risk mitigation strategies to help optimize portfolio outcome potential.

What lessons are you seeing institutional investors take away from the pandemic?

David Millar: From an investment perspective the crisis has served as a reminder about the need to be prepared for a broad range of investment scenarios – both good and bad. How long the pandemic might last and its longer-term economic effects remain difficult to predict. However, we have seen that investors overexposed to risk when it began, as well as those who may have played it overly cautious when markets began to rebound, were likely to have suffered more disappointing relative portfolio performance than those that maintained more optimized risk/reward exposures.  

The good news is that there are a broad range of strategies that investors can tap into today to help better diversify traditional asset class allocations by adding lower- and non-correlated assets. These types of strategies can add meaningful portfolio value by helping to strengthen overall defensive and upside characteristics.

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Scott Wolle:
The crisis also highlighted the importance of maintaining liquidity. Risk assets of all types experienced a sharp selloff at the start of the pandemic. In order to navigate this type of extreme turmoil, it is important for investors to know where they can turn to for liquidity in their portfolios should they need to – especially when everything seems to be falling.

Highly liquid multi-asset solutions are designed to offer an attractive choice in this type of climate. These strategies often pursue steadier return streams with an attractive upside beyond that traditionally available from most fixed income securities – and without the drawdown exposures of equity markets. This can help provide an expanded range of investment levers to help optimize expected return consistency through all types of investment cycles.

How can multi-asset strategies work for risk mitigation?

Millar: Multi-asset strategies are designed to offer flexibility that allows for a shift away from specific market-driven performance to more absolute return and other outcome-oriented solutions that strive for greater control over risk exposures. A major advantage of these strategies is that they seek to offer a way to increase potential portfolio risk efficiency with greater liquidity, transparency, and cost efficiency compared to strategies such as hedge fund, private equity, and venture capital investments.

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What are some of the different ways these strategies attempt to shape risk exposures?

Wolle: In terms of risk mitigation, let’s start with risk parity, where allocations are based on volatility contribution rather than capital exposures. In a traditional 60/40 portfolio, history shows up to 90% of risk is generated by the equity allocation, which isn’t balanced at all. By contrast, our Balanced-Risk Allocation strategy optimizes allocations across equity, fixed income, and commodity market exposures. It does so through up to 30+ sub-asset classes, and is based on each asset class contributing an equal amount to overall risk. A slight tactical overlay then seeks to help take advantage of current market conditions. The goal is to deliver more consistent returns across the full economic cycle, with less risk than a traditional 60/40 allocation. While returns will still be linked to these underlying markets, the strategy’s balanced risk approach has generated lower correlations of 0.73 and 0.491 to global equities and U.S. fixed income markets, respectively, since inception2.

A More Balanced Approach


How can absolute return strategies work in today’s market environment?

Wolle: Absolute return approaches can vary widely in terms of philosophy and execution, offering investors a broad selection to help meet their specific needs and goals. For example, the Invesco Macro Allocation strategy is differentiated by its systematic use of risk premia exposures rather than alpha potential for allocation decisions. It utilizes some of the same tools as our Balanced-Risk Allocation strategy, starting with a risk-balanced core, but significantly dials up the tactical overlay to be the primary return driver by using directional and relative volatility trends. It also invests in long and short positions, which provides greater flexibility to pursue absolute returns independent from broader capital market indices. The result has been a unique risk/reward profile that historically has delivered consistently positive returns over longer timeframes, largely uncorrelated with assets traditionally associated with attractive defensive attributes in difficult markets.

Millar: Our Global Targeted Returns strategy takes a different approach, breaking from traditional asset allocation models through an idea-driven portfolio. The strategy combines extensive research with risk modeling to blend together up to 30 investment ideas identified by searching across global assets, geographies, sectors, and currencies. These ideas can be expressed using credit and government securities, equities, commodities, and currencies, as well as other exposures such as inflation, interest rates, volatility, and relative value pairs trading.

One idea paired a long Russian ruble position with a short Chilean peso position. The portfolio has benefited as the cheaper, higher-carry ruble has strengthened against the peso, as the twin-surplus Russian economy has been better positioned than the twin-deficit Chilean economy. This type of drilldown to find compelling ideas can pursue gains from within an asset class – in this case emerging markets – without being dependent on the overall direction of the broader market itself.

Each idea is selected based on its potential to add independent, positive returns over a two- to three-year time horizon. Relative size is based on return potential and expected volatility under various economic scenarios, both in isolation and in relation to other ideas. The goal is to deliver a consistent, positive hit ratio across the majority of ideas, with no single idea or risk exposure dominating performance. Achievement of that goal is seen in broadly diversifying return streams that positively skew monthly returns while significantly lowering equity beta exposure and avoiding extreme drawdowns.

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How are institutional investors incorporating these types of strategies into their portfolios?

Wolle: It depends on the strategy and its characteristics, and the investor’s goals and investment guidelines. The Balanced Risk Allocation strategy is often used as a more risk-efficient option for, or complement to, a traditional 60/40 portfolio allocation. Macro Allocation is usually placed within multi-asset or liquid alternatives sleeves or as a hedge fund complement or replacement, due to its excess return focus, relatively low fees, daily liquidity, daily pricing, and absence of lockups.

Millar: Global Targeted Returns is frequently placed in a global tactical asset allocation or opportunistic sleeve, typically with other liquid alternatives or hedge fund investments. One of the unique characteristics within the multi-asset space is that in addition to having lower correlations to traditional assets, these strategies also often exhibit lower correlations to one another due to the relatively wide range of investment styles. Because of this, investor allocations can include complementary strategies to further optimize portfolio risk/reward exposures.

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1 As of April 30, 2020.

2 June 2, 2009.

This document is intended only for institutional investors in the U.S. It is not intended for and should not be distributed to, or relied upon, by the public. This is for informational purposes only, is not to be construed as an offer to buy or sell any financial instruments, and should not be relied upon as the sole factor in an investment-making decision. This document contains general information only and does not take into account individual objectives, taxation position or financial needs. This does not constitute a recommendation of any investment strategy for a particular investor. As with all investments, there are associated inherent risks. Investors should consult a financial professional before making any investment decisions if they are uncertain whether an investment is suitable for them. The opinions expressed herein are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. All data as of April 30, 2020, unless stated otherwise.

Invesco Advisers, Inc. is an investment adviser that provides investment advisory services and does not sell securities. NA7064

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