The portfolio of the future
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Blurring of lines: Index and Active
In the post-pandemic world, investors need to be agile to navigate volatility and seize opportunity. So don’t get stuck thinking about index versus active. Successful wealth creation in this new era will come from harnessing the power of both.
By taking a ‘whole portfolio’ approach that blurs the lines between index and active strategies through index ETFs, active ETFs, and active mutual funds, you can exploit your skill in timing markets and picking exposures precisely and nimbly – while keeping a lid on costs.
Embracing a broader investing toolkit like this is the way to succeed in an uncertain world. And remember: using ETFs for both index and active strategies can free up fee budget for more highly-skilled alpha-seeking managers.
Be dynamic
Clinging to old habits? You might be limiting your performance potential – right when clients are setting a higher performance bar.
With higher uncertainty and higher performance dispersion in specific markets, fixed or ‘set and forget’, strategies could soon turn to ‘set and regret’. It's time to be more dynamic. A flexible and more granular blend of asset classes should see you adapt and thrive.
Read our guide for expert insights that could help you succeed in the years ahead. On dynamic asset allocation, portfolio stress-testing, and investor education, we’ve got you covered.
Embrace change
In the past, portfolio builders have placed a lot of emphasis on picking, and sticking with, investment products.
Stategies built through broad and fixed allocations, adhered to false dichotomies like ‘public versus private markets’, or ‘passive versus active’, safe in the assumption that most investment choices would work.
Today, there’s far less conviction over the path ahead - prompting one of the most significant investment process transformations seen in a generation.
This new investment reality demands a more integrated approach. The moment is ripe for a rethink.
Why asset mix matters more now
Your asset mix matters more than ever now, and traditional fixed allocations to public markets might not be up to the job. Time to blur the lines and prioritise strategic asset allocation in your investment process.
CIO Pulse
Alister Hibbert
Qu 1 – What is the top current investment opportunity a CIO should consider to grow their business?
My answer is to go back to where it all started – public equities and, specifically, active investing in public equities. Equity markets are a phenomenally large, deep and broad opportunity set and their potential eclipses all other asset classes. Nearly all the value creation that comes from economic growth is to be found in equity markets – today think of AI or weight loss drugs - but this value will only accrue to a handful of public companies.
So, what’s key is selectivity in equity markets, given that most businesses are relatively uninteresting over the long term, even if they’re attractive from time to time. A subset of equity market exposure focussed on businesses with high returns that can remain that way over time, and an opportunity set that allows them to grow at least in line with global nominal GDP growth over time. And that’s the ultimate prize.
Within this, developed market equities typically have lower governance, geopolitical and currency risks, and its also important to avoid futurology and quoted business plans. Exciting stories can be extraordinarily compelling but investing in companies with market caps which bear no relation to the scale of the business as you would measure it in revenue or asset terms is inherently very high risk. Trying to find the next Tesla has been a difficult journey for investors.
So, for a CIO, I think the top current investment opportunity is the same as it was 10 years ago, and likely the same as it will be in 10 years’ time, and that’s selectively investing in public equities to help drive long-term growth for stakeholders.
Qu 2 – What is the top overall investment consideration a CIO should currently take into account?
Alongside the incredible opportunities for CIOs to capture in today’s markets, there are challenges. And among the most pertinent are behavioural ones.
CIOs have an extraordinary array of tactical tools which are surgical in their precision and offer lots of liquidity. And that’s the great thing about public markets – you can change your mind in a way that is just not possible when it comes to in private markets. But as impressive as that toolset is, it also represents temptation and a pathway to short-term, sub-optimal decision-making.
So the one thing I would always try to remind myself of a CIO would be that: all issues which are genuinely cyclical in nature are self-healing in time. After a bear market there’s a bull market, after a company misses its numbers because revenues fall short of budget for a cyclical reason, management adjust the cost base.
Despite this, the reality is that the short-term noise in markets is deafening, and it impacts expectations – from end clients to Board members. And I sympathise with CIOs on this front, especially as we now witness the building, almost overnight, of what we call ‘false market narratives’.
In March 2023, for instance, Silicon Valley Bank went under at which point investors believed that a banking crisis and credit crunch were upon us. Why investors believed this when there was no identifiable default cycle impacting the banking sector is beyond me but, at the time, it was a powerful narrative with few dissenters. These market narratives can be dispelled with in-depth analysis of companies and sectors but are dangerously persuasive at the moment that they burst into life.
The risk for CIOs is that while that narrative is playing out, or while those cyclical issues are working themselves through, investment decisions are taken that ultimately lead to whipsawing, in which case the impressive tactical tools at our disposal haven’t actually helped us.
CIOs may need to manage around short-term volatility as nearly all face real institutional constraints imposed by their boards, business transformation dynamics, and end client behaviour. But, if long-term capital growth is the objective, then we need to remember that a mark to market cyclical loss is not the same as a permanent loss of capital unless we make it so by selling at the wrong time. Even the calamity of 2008 is now no more than a blip on a chart of the S&P500.
Qu 3 – 3 x quick fire questions:
And now for some quick fire questions.
- Positive or negative AI?
So AI is about as nuanced and confusing as it gets. For now, the outlook remains fantastic and there is almost no chance that the hyperscalers are going to stop investing in training models and then just leave their peers to take all the market, especially when they have so much cashflow to fund it. As long as they believe that their models will scale with more compute and data, it is unknowable how powerful and potentially valuable these models can become. Longer term, trends will be driven by the performance of these models, something we will watch extremely closely.
- Positive or negative electric vehicles?
Unfortunately for now, negative, as democracies and policy only work with the permission of the people and a growing backlash against green policy agendas is evident in the West. This could change, of course, since the electorate can be fickle at times, but the biggest problem is that the cost of the energy transition falls disproportionately on lower income households and a rebellion is underway. From heat pumps to highly expensive electric vehicles, these costs are becoming real to people and their popularity is falling as a result.
- Positive or negative the consumer?
Short-term, we’re wary of consumer exposures as cautious lenders and tight monetary policy have reduced consumer unsecured credit growth to low levels and maxed out credit cards, changing spending patterns and not for the better. Nonetheless, with inflation gone, the Fed is now free to reduce interest rates which, in turn, will take pressure off the consumer. Areas currently in the doldrums like housing or luxury goods should benefit in due course and be an opportunity for investors medium term.
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CIO Pulse
Introducing CIO Pulse, a brand-new video series designed to help CIOs stay on top of today’s transformative opportunities. Hosted by Ursula Marchioni, Head of EMEA Investment & Portfolio Solutions, CIO Pulse features thought leaders from across BlackRock offering fresh perspectives on the most significant trends reshaping investing and tech.
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