INVESTMENTS & PENSIONS
HOW ACTIVE MANAGEMENT WITHIN A RISK CONTROLLED PORTFOLIO CAN MITIGATE LOSSES IN VOLATILE MARKETS ?
One of the key considerations for managers of multi-asset strategies such as Managed Portfolio Services ( MPS ) is how best to minimise losses and control drawdowns during periods of heightened market and asset price volatility . An increase in volatility may be caused by idiosyncratic risks , such as the stress within US regional bank equities seen during Q1 of 2023 , or it may be the result of a broader shift in the macroeconomic environment as the interest rate cycle changes due to growth and inflation expectations .
In the years leading up to 2021 the global economy experienced a long period of benign inflation , historically low interest rates , and steady yet unspectacular GDP growth . This provided a positive backdrop for asset prices , particularly those sensitive to changes in interest rates such as growth equities , small-cap equities and , within fixed income , longer-dated bonds . The fiscal and monetary policies enacted by governments in response to the Coronavirus outbreak of 2020 helped turbocharge asset returns as interest rates turned negative and inflation cratered due to the shuttering of the global economy . Managed Portfolio Services , which have much of their exposure in the two largest asset classes of equities and bonds , performed very strongly as a result .
As Covid restrictions and lockdown policies were eased during 2021 , the global economy began to re-open and the resultant surge in consumer and business demand contributed to the reemergence of inflation . By late 2021 it was clear that inflation had become a major problem and central banks were forced to act by substantially increasing the cost of capital and reversing years of low interest rate policy . This sudden move higher in interest rates catalysed a steep fall in asset prices , particularly in the growth-dominated US equity market and in longer-dated government bonds . For Managed Portfolio Services that had not taken steps to reduce interest rate risk 2022 was a particularly poor year with some investors losing between 10 and 15 percent of their portfolio value .
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