Retirement Portfolio Resilience Perspective
Primary Pillar: Risk Pricing Discipline
Supporting Pillars: Retirement Portfolio Construction • Resilience Across Market Environments
This early edition of Gyrations presents a structured framework for assessing investment risk and explains how changing market conditions influence portfolio construction through the pricing of risk rather than market prediction alone.
Viewed through today's Retirement Portfolio Resilience Framework, the enduring principle is that resilient portfolios are constructed through disciplined capital allocation informed by observable market conditions and the commercial pricing of protection. The publication also recognises the limitations of traditional income and growth portfolios, highlighting the need for complementary portfolio construction approaches that reduce dependence on favourable market conditions. While the terminology reflects the investment environment of the time, the underlying philosophy remains central to the evolution of Retirement Portfolio Resilience.
This publication forms part of Gyrostat's historical research archive documenting the evolution of the Retirement Portfolio Resilience Framework.
In this monthly report we provide insights into risk management of an equity portfolio.
- Global macro conditions (in pictures) with key upcoming data release with market pricing of outcomes based upon the flow of money (where available)
Our investment view is that interest rates will stay low for an extended period, and stock market volatility will increase. During 2012-2015 the level of volatility was low by historical standards. Our expectation is that volatility will increase, leading to “risk-on”, “risk-off” investing market characteristics only distantly related to fundamentals. Volatility has started to increase in 2016. During the past month, volatility has fallen to near decade lows.
With this view, there is a need to expand the range of ‘income’ assets to include risk managed equity funds. Re-allocating ‘income’ to ‘growth’ assets in search of higher returns exposes investors to substantial fluctuations in capital value.
The ideal solution is to buy blue chip shares with insurance resulting in a “hockey stick” payoff always in place –always participate in the upside with minimal capital at risk. This delivers higher income while always protecting and growing the investors’ capital. This forms part of an ‘income’ allocation of a portfolio and is suitable for all investors.
