According to Zenith’s 2015 Multi-Asset Sector Review, investment managers are required to look beyond traditional portfolio diversification methods to defend against extreme market conditions.
Zenith head of multi-asset and income research Andrew Yap said managers are beginning to adopt innovative risk management strategies.
“Key amongst these has been a renewed focus on active manager selection, tactical asset allocation and the incorporation of alternative sources of market beta,” Mr Yap said.
“No singular ‘silver bullet’ solution existed, and the responses taken will in part be guided by the manager’s investment ideology and flexibility afforded by way of mandate options.”
According to the report, tactical asset allocation can provide investment managers with added flexibility in tilting a portfolio away from overpriced asset classes.
Zenith also pointed out that total portfolio hedges and asset-class hedges have become more prevalent.
“Sector participants embracing such an approach typically define a target level of volatility, and when breached, will trigger a proportionate reduction of risk across the entire portfolio and through a set of synthetic overlays,” the report said.
In terms of asset-class specific hedges, "whilst this method permits a more targeted approach to managing risk, but may be less useful in an environment where an asset class other than equities is the key driver of overall portfolio volatility".
Zenith indicated that volatility creates an opportunity for active managers, particularly concerning the identification and subsequent implementation of directional trades.
Moreover, most investment managers are providing more conservative forward guidance in regards to their portfolio outcomes, expecting continued risk and low returns going forward, said the research house.
