Speaking at an event on the Gold Coast, SSgA senior managing director of the Investment Solutions Group Dan Farley pointed to the predominance of equity risk in portfolios as “one of the key areas that has not been dealt with properly post-GFC”.
“As we came out of the Lehman [Brothers] crisis everyone was very focused on tail risk control and mitigation strategies. And as we’ve moved farther and farther away from that, we start to see those conversations wane a bit,” he said.
Investors have a tendency to refer to the GFC as a ‘one-off’ event and question whether such mitigation strategies are necessary, said Mr Farley.
“We say: absolutely. The number of times we see those challenging equity markets is a much more frequent thing than people build into their assumptions,” he said.
“In each decade going back to the 1920s there’s been at least two major market events. With that [in mind], the idea of making sure we control that equity risk is critically important,” said Mr Farley.
Investors need to be more dynamic with their portfolios in two ways, he said.
First, they need to be in the ‘right’ risky assets at the right time, since there is a wide variation within the returns of risky assets during different ‘regimes’; and second, investors must be completely out of risky assets in high-risk environments, said Mr Farley.
“The ability to identify those regimes and ultimately make portfolio adjustments has been critically important in delivering an absolute return objective, which most investors have,” he said.
SSgA also offers investors a ‘target volatility trigger’ overlay that automatically ‘de-risks’ a portfolio by selling equities when the amount of risk present in the market hits a certain threshold, said Mr Farley.
