John O’Toole, head of multi-asset solutions at Amundi, says not losing money in a crisis is something to which clients are particularly attached, so even though there may be opportunities over the longer-term, this is often not central to a client's thoughts.
He adds: “You can’t talk about relative returns [that is saying you lost less than the wider market], clients don’t care about that. What they care about are drawdowns, about losing money. That is why we are always looking for hedges, for ways to protect portfolios. A crisis can always get worse, and so hedges are always useful. It is not simply a case that when a crisis happens, that is the bottom of the market.”
Nature of a crisis
Ursula Marchioni, head of BlackRock Portfolio Analysis and Solutions, says the nature of the crisis is also an important consideration, as while one can use traditional hedges, each individual crisis will have its own idiosyncrasies.
She says: “Having strategic asset allocation views and maintaining the discipline to stay invested during periods of market volatility is a key principle of successful investing. However, with significant geopolitical and macro shifts at play, coupled with uncertainty around the smoothness of the climate transition, it is more important now than ever to have uncertainty baked into your central portfolio return scenario at the outset. It also matters to have strategic views that incorporate a wide range of both positive and negative market outcomes, so that the strategic asset allocation you anchor to is more robust.
"Planning for different market environments based on historical scenarios is a great starting point when stress-testing the long-term investment thesis of a portfolio. However, on its own this approach can be insufficient. Every market crisis has idiosyncratic challenges and opportunities.”
SJP's Wiggins says it may be best to be “systematic” about any portfolio rebalancing; whether markets are in a bull or a bear phase, have a process around when to sell, rather than acting as a result of either fear or greed.
Marchioni says that major shifts in strategic, or long-term, asset allocation are needed now, such is the extreme nature of the changes happening around us, particularly in relation to inflation and interest rates, and she says that at BlackRock these changes will happen this year.
She says: “When speaking to our clients and analysing their portfolios, it is clear big changes to strategic asset allocation are needed and will unfold this year. This is not only a result of the escalation between Russia and Ukraine, but also supply chain disruptions and powerful inflationary forces in place prior to that.
