The world’s response to the global pandemic is to innovate – countering uncertainty and fear with ingenuity.
This means many aspects of our lives are now different and will likely remain so even when an effective vaccine is available.
The same applies to investment strategies. Compared with the past, generating returns in this environment requires a more flexible and focused approach, and awareness of environmental, social and governance risks, particularly social change.
Many of the changes – such as very low interest rates – will be at least semi-permanent. We must all consider whether yesterday’s investment strategies will still be appropriate for tomorrow.
The risk framework for some portfolio designs is now challenged. The appearance of a new type of shock to the system should not be ignored.
Future analysis must now take account of threats to several industries and businesses, and radical changes to our behaviour.
More static investment processes, reliant on the continuation of historic correlations and risk characteristics, may fail to respond reliably to this range of new scenarios.
The rapidity of change exacerbates the challenge. Not only was the outlook for the global economy turned on its head in a few days in February, but also the burst of innovation that has been unleashed by our need to adapt lifestyles means we are entering a sustained period of profound change.
This is obvious in shifting patterns of leisure activity and travel. The implications for entire sectors of the global economy mean more adaptive portfolio management is critical. Only actively managed portfolios with broad and flexible mandates can do this.
The increased rate of innovation is already having consequences. The acceleration in growth seen by some businesses is matched by the hastened decline of many others.
This is currently most visible in the retail industry but manufacturers globally are also re-evaluating their supply chains: abandoning ‘just in time’ methods for ‘just in case’ security. To capitalise, portfolio managers need to target investments very precisely.
The apparent simplicity of taking market-wide equity index positions means buying plenty of comparative losers as well as a handful of winners, dampening the return prospects.
This is a time to be more selective in approach by understanding the drivers for change and selecting the sectors and themes that are set to benefit.
These effects will not be felt uniformly across the world. As we saw with the virus itself, the impact is varied across countries and affects industries very differently. This creates opportunities for portfolio managers to develop return-seeking ideas by favouring one asset over another without taking significant market risk.
In the early stages of the downturn, for example, the scope for a more significant response by the US Federal Reserve compared with the European Central Bank created huge return potential for flexible investment mandates.