Reality Check: Hidden Portfolio Opportunities and Risks

Sarah Pickert

Reality Check: Hidden Portfolio Opportunities and Risks


Now is the time to put what you learned to work and avoid being caught off guard. Here’s a short checklist to help you out. Educational Session for Staff or Investment Committee Capital Markets are undergoing dramatic but often unnoticed changes. Risk is being repriced, asset class behavior and correlations have changed, and diversification strategies need to be reevaluated. Make sure your staff, investment committee, board members and trustees know about the latest trends, emerging asset classes, and new investment policy strategies. Update Your Asset Allocation/Efficient Frontier Modeling Given the lower return expectations for equities and the predicted low return for fixed income, plan sponsors need to rethink asset allocation decisions. Studies show that as much as 90 percent of fund performance is directly attributable to asset allocation. Deciding your fund’s long-term asset allocation is one of the most important decisions you will make as a fiduciary. Review Your Plan Strategy/Investment Policy Statement Will your stance with passive investments and active managers serve you well going forward? Do you have a deliberate policy for rebalancing your portfolio? Does your Investment Policy Statement reflect the appropriate risk tolerance, support your spending policy or reflect your funding status? The establishment of an investment policy serves as the foundation on which all other decisions can be made with confidence.

Event Speakers

Reducing Portfolio Risk with Alternatives

Don Lennard
Senior Consultant | DeMarche

Long gone are the days when institutional investment portfolios consisted solely of cash, equities, and fixed income. Plan sponsors are continuing to look more and more at alternatives to provide diversification and improved portfolio efficiency. Ancillary benefits of alternatives include enhanced management of portfolio volatility, potential for income generation, and improved probability of meeting return objectives. While beneficial, these attributes must be weighed against the plan’s liquidity requirements and the need for transparency.


Private Capital Markets: A Slow-Moving Revolution

Coleen Trimble
Senior Consultant | 

The number of publicly listed US stocks is at a new low. In 1974, the Wilshire 5000 index, a cap-weighted index of all stocks actively traded in the US, was 5000 stocks and peaked in 1997 at over 7000 stocks. Today, that number has fallen to 3,500.  A shift is occurring in the opportunity set within public equities due to the increasing interest in private markets. For example, start-ups, which are often supported by Private Capital, are waiting longer to go public. M&A activity has increased and, due to fewer IPO’s, the average age of a publicly listed company is now 18 years versus 12.  Investors could miss out on good returns if they only consider the public market universe, and the shift bodes well for the consideration of private equities.


Credit Investing Beyond the Barclays Agg

Christopher D. Long
President, and Chief Executive Officer | Palmer Square Capital Management

In this presentation, Palmer Square seeks to describe how changes in the Barclays Agg should cause investors to examine other opportunities within the vast universe of credit.  Exposure to an expanded universe of credit (i.e., CLOs, bank loans, ABS) can potentially provide additional income capture, diversification within an investor’s overall fixed income allocation, and total return opportunities.


Private Equity: Looking Back and Forward

Bernard Yancovich
Managing Director, Private Markets IC Member, Private Equity Investments | 
GCM Grosvenor

The private equity market continues to expand and evolve as institutional investors commit an increasingly larger portion of their portfolios to this important asset class. In this session, we review some of the factors driving this growth, the ways in which investors are able to access private equity investments as well as some historical performance metrics. As markets mature and limited partners have become increasingly sophisticated, the ways in which they are able to execute their investment programs has expanded to the benefit of investors. We believe secondary funds and co-investments enable investors to obtain more targeted exposures at potentially reduced fees and are an effective means of mitigating the J-curve impact commonly associated with primary funds. Finally, with interest and demand for private equity expanding, middle market buyouts and investing with small, emerging and diverse managers are identified as sectors which we believe may be less competitive and offer attractive returns.


Changes to the Bloomberg Barclays U.S. Aggregate Index – Risks and Opportunities

Douglas Gimple
Senior Portfolio Specialist | 
Diamond Hill Capital Management

The allocations in the widely-used Bloomberg Barclays U.S. Aggregate Index have changed dramatically since the financial crisis, resulting in higher durations, lower yields and a smaller subset of opportunities to enhance yield and returns. This confluence of changes magnifies interest rate risk and the potential for negative surprises at a time when yields are currently rising. Diamond Hill will discuss “Changes to the Bloomberg Barclays U.S. Aggregate Index – Risks and Opportunities”. Many of these opportunities are not currently included in the Bloomberg Barclays U.S. Aggregate Index and could potentially provide both increased yield and reduced overall risk from rising rates.


Psychology & Risks in Equity Markets

Ryan D. Taliaferro, Ph.D.
Senior Vice President, Director, Equity Strategies | Acadian Asset Management

Psychologists observe that human brains have two modes of thinking, a “fast” mode that is automatic and effortless, and a “slow” mode that is focused, intellectual, and effortful. The slow mode makes rational, logical deductions and choices, while the fast mode uses heuristics and rules of thumb to make quick decisions. In taking such shortcuts, humans may be prone to errors, which in financial markets can lead to mispricing. One important mispricing that is strongly evident in equity markets is a mispricing of risk. This pattern may be exploited by rational investors, and the resulting strategies may be complementary to existing components of typical asset allocation schemes.