Check out our recap of the ALTSTX event and see where the future of the 60/40 portfolio, inflation, and ESG risk metrics are headed in 2023.
Vidrio Team, Vidrio Financial
Vidrio Financial attended the ALTS Texas event, (ALTSTX) November 2-3rd and heard from industry thought leaders on a range of different topics from the evolution of the 60/40 portfolio - why portfolio construction is changing, the role of inflation in current investments and whether it’s here to stay, and the importance of ESG for today’s allocators. This event helped regional players expand the dialogue on relevant topics impacting investors and managers today. Here are some of Vidrio’s thoughts and our takeaways from this event.
The future of the 60/40 portfolio:
The keynote panel moderated by Blair Smith, Senior Director, Financial Markets, Milken Institute, and featured panelists Ken Shoji, CFA, Chief Investment Officer, View Capital Advisors, Charles Mansfield, Senior Director, Client Portfolio Manager, MissionSquare Retirement, and John Tsui, Managing Principal, Peninsula House.
According to Charles, the role of the 60/40 portfolio for diversification hadn't changed in the last 20 years and provided attractive risk-adjusted returns in most instances. As investors start looking towards the future, with inflation showing no signs of slowing down, more allocators are moving into alternative investments to capture better returns. Recently Vidrio Financial highlighted a story in its social media update from the Alternative Investment Management Association, where two of their leaders highlighted the benefits of liquid alternatives. Despite improving alternative returns, less than 20% of Canadian wealth advisors have an alternatives allocation in their current investments. Canadian experts attributed this below-average take up to a couple of specific issues:
- In comparison to US markets, Canadian alternatives markets are not as mature as those in the US.
- Private funds have seen higher risk ratings in the past, but with an inflow of new types of alternative investments, risk ratings may improve as a result.
From the Canadian investor perspective, they believe we might be on the path to seeing a rebalancing occur where the new portfolios could be more of a 50-30-20 model. From a Vidrio perspective, we have also been hearing that the trend of high interest rates and inflation will lead to more allocations into alternatives as allocators search for other options of uncorrelated assets outside of traditional fixed income and equities.
During our time at ALTSTX, there was a lot of discussion around inflation and whether it would be transitory, and what could push inflation higher than the current rate seen today. Panelists agreed that inflation was here to stay and higher rates could be possible if there was little resolution to global conflicts and if any further policy missteps occur.
Also of note, was the impact of pivoting to more onshore manufacturing and taking down the reliance on production from overseas. Panelists felt this would have significant impacts on production costs and cause widespread market disruption. One example, from a recent article in NASDAQ, focused on the semiconductor industry. Over the last few years, both sides of the political aisle have understood that semiconductors hold weight over the global economy, and as China becomes more confrontational with US policies it will become increasingly important to explore onshore semiconductor manufacturing options.
Within the inflation discussion, panelists also thought allocators were experiencing a degree of FOMO (fear of missing out) with liquidity increasing and many allocators sitting on the sidelines in cash. It was felt that many institutional accounts are at risk as 2022 comes to a close and investors might look for opportunities that fight off inflation while presenting a decent total return to their portfolios. Many viewed this as an opportunity for alternatives across private markets to shine.
ESG and Measuring Investment Risk:
Attendees also showed increased engagement on panels that included ESG in their discussion threads, specifically, when it came to managing risk. Today, ESG is a part of every discussion thread across the various news outlets. Here at Vidrio, we have been leading the way when it comes to codifying risk metrics across a time-series of returns as well as portfolio position-level data. We have also prioritized ESG scoring parameters within Vidrio’s latest client dashboard.
During the ESG discussion, it was mentioned that there have been observed differences in how managers approach risk when inserted into a portfolio analysis vs. the creation of a product or investment strategy that is purely based on ESG. Managers have seen some clients voice their opinions that investment performance is secondary to ESG strategies, but most asset managers today are doing a lot of rewashing with their portfolio strategies and haven’t fully incorporated an ESG outlook into their investments. Back in October, Vidrio posted a blog around ESG and its impact on investors, through that intelligence, we cited a lot of risks to investors in trying to understand the best ESG strategy and how fund managers can cut down on (or perhaps contribute to) the confusion. The panel that we observed, all agreed that ESG is a valid risk factor and important for a quality portfolio strategy, however, it can’t be the leading factor or metrics and shouldn’t trump the current data set that allocators are monitoring for portfolio performance.
We would be happy to speak with you about any of the above discussion points, and we encourage you to view the Vidrio Blog for more insights and ideas. We’ll also be at several ALTS events (Miami, and Los Angeles) in the coming months so be sure to connect with Vidrio Financial onsite.