Navigating a New Risk Paradigm

In this webinar co-hosted with Northern Trust Asset Management, we explore the new risk paradigm of increased volatility and heightened market risk.

We will argue that this volatile environment, where the direction of market risk can change on a dime, is here to stay and has the potential to wreak havoc on investor portfolios.

We look at the key driver of this increased volatility and the implications for portfolio construction.

We will also look at how investors can view, analyse and deploy risk across all asset classes to achieve their objectives in this new market paradigm and uncover common sources of unintended risks, while developing strategies to mitigate them.

Transcript (with timings)

3:01 – Investors have to be more precise in the risk management of portfolios and how they select and analyse managers.

3:37 – The ‘index of fear’ shows that the frequency and severity of volatility shocks are both increasing, particularly in the period since the GFC.

5:00 – There is more tail risk in equity portfolios than there has been in the past.

5:40 – The trend in volatility in down markets is getting more severe.

6:53 – Which aspect of an equity benchmark (country, region, sector, etc) is contributing more to volatility?

8:02 – There are some very credible microstructure reasons for why we are seeing increased volatility.

8:33 – Passive market share for institutional investors has increased dramatically since 2000.

9:18 – What is the ‘inelasticity’ of the market?

11:44 – What questions should investors be asking to ensure they are prepared for this heightened level of volatility?

13:01 – Does taking more risk always deliver higher returns?

14:16 – There are 6 common themes that can help investors diversify away the risks that are uncompensated and keep those that are compensated.

15:28 – Investors looking for a lower risk profile might do this by overweighting defensive sectors: real estate, stapes, utilities, etc, but that can expose them to unintended bets that are not compensated over the long term.

16:39 – Diversification can be thought of in terms of active share, at a sector, regional or country level, or growth vs value.  Is this sufficient?

18:38 – Hidden risks are the rule rather than the exception – investors need to be diving deeper to get an accurate view.

20:45 – Equity market returns are likely to reduce from those seen over the last decade.

25:52 – Can you successfully time markets?

28:03 – Which factor is the most compensated from a risk perspective?

29:36 – Risk can be different when looking at a diversified portfolio vs an equity portfolio.

30:50 – Tech stocks have had a strong influence on volatility shocks.

31:37 – Does a total portfolio approach help with identifying risks?

33:08 – The passive market share might increase more still.

34:54 – In historical research, outperforming active managers had the bulk of their excess return  derived from 4 key factors.

36:50 – How do you think about climate \ sustainability goals and ESG risks?

38:24 – Unlisted/illiquid assets are in themselves risks to a portfolio.

 

Presenter: Michael Hunstad, Deputy CIO and Head of Global Equities, Northern Trust Asset Management

Facilitator: Wouter Klijn, Director of Content, Investment Innovation Institute [i3]

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