Lower for longer is over – and the traditional negative correlation between stocks and bonds has vanished, at least for the time being. This issue of Risk & Reward features two articles that analyze what this means for portfolio insurance and asset allocation. Read on to learn why it’s time to rethink popular approaches, and why the times for investors may be better than many believe!
Dynamic Proportion Portfolio Insurance strategies certainly benefit from periods of higher interest rates: the cushion increases, returns go up and insurance costs go down. In our feature article, Invesco analysts describe just how this works and show how to take advantage of it.
We then demonstrate ways to make the most of positive correlations between stocks and bonds. This may be a challenge for traditional asset allocation – but who said we need to stay traditional? If one looks just a bit further, uncorrelated returns are still possible. Our innovative factor strategies provide the necessary building blocks.
Next, we turn to short sellers: They are often regarded as eternal pessimists, and sometimes they are blamed for stock market crashes. But they have an important role to play in price discovery, especially because they are usually well informed. Find out how we use shorting data to improve portfolio performance.
In the ESG category, we look at Paris alignment. Many investors seek to align their portfolios with the 2°C target for global warming – but the variety ofavailable strategies makes for a confusing landscape. In line with our factor-based investment philosophy, we’ve developed a process that balances climate protection with return targets.
Finally, we continue our series on tax-optimized portfolio management, this time showing how to transition a portfolio without a hefty tax bill right from the start.
We hope you enjoy this edition of Risk & Reward.
Click below to read the featured articles within this edition of Risk & Reward.
Portfolio insurance in times of higher interest rates
Higher interest rates aid Dynamic Proportion Portfolio Insurance (DPPI) strategies, as they serve to increase the size of the cushion and, hence, the risk budget. We also show why a risk-managed multi-asset portfolio is a good alternative to a fixed income portfolio.
Liquidity and diversification: Absolute return strategies for asset allocation
With the re-emergence of inflation, the negative correlation between equites and bonds has ended. Using various factors, we have researched an absolute return approach that may serve as an uncorrelated portfolio component.
Alpha in shorts: Shorting activities and the cross-section of stock returns around the world
Short sellers convey information through their bearish view. We’ve constructed a ‘shorting signal’ to reflect and measure shorting activities, which could unlock robust return premiums across regions and market capitalizations.
Don’t be blind just because a benchmark is Paris-aligned
As investors try to structure their portfolios in accordance with the Paris climate targets, confusion may arise from the diversity of available strategies. To overcome this, we researched Paris-aligned objectives to better understand the sources of risk in low tracking error Paris-aligned portfolios using a 2-step factor-based process that balances Paris alignment with return performance.
Tax optimal equity portfolio transition
When – as in the US – realized gains are taxed and unrealized gains are not, investors may defer or even forgo a necessary portfolio adjustment. To address this, we have developed a framework for transitioning a legacy portfolio towards a more diversified target portfolio with a given annual tax budget.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Data as of June 30, 2023 unless otherwise stated.
This document is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only, it should not be relied upon as recommendations to buy or sell securities.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.
