• Credit
  • Fixed Income

No time for heroes: How portfolio construction can help investors navigate unfamiliar economic and market regimes

We are back in an old, but unfamiliar market regime. In a period where simple playbooks may falter, Jeremy Albers sets out why portfolio construction can make the difference.

We have re-entered an inflationary regime that is not exceptional by historical standards but is unfamiliar territory to many in the industry. When central banks now talk about inflation, it is deemed “normal”. The fact is that inflation is normal; it exists in most countries, but many developed market economies haven’t had much of a taste of it for some time.

And, in early 2022, the Russian invasion of Ukraine has added a new source of complexity and volatility to financial markets, as well as further inflationary pressure through spikes in energy prices. It has also highlighted how fragile market sentiment is in the face of unexpected and unpredictable geopolitical events.

Consequently, the job of central banks has become acutely more difficult; meanwhile, portfolio managers and chief investment officers are now in the toughest macro environment since the 1970s. Simple investment strategies that work well in stable price regimes may no longer be so effective.

It will be tempting for portfolio managers to make bold directional market calls in this environment – and there will be winners and losers among those that do. But now is not the time to be bold. For investors seeking resilient outperformance, portfolio construction is an invaluable tool that can help prepare for such uncertainty.

Download ‘No time for heroes’ to understand:

  • Why higher inflation may continue and central banks’ reactions will be different this time
  • Why simple investment playbooks may falter, and outsized market direction calls come with far higher risk
  • How portfolio construction can help build resilience and complement bottom-up security selection

Key risks

Investment risk

The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency and exchange rates. Investors may not get back the original amount invested.

Credit risk

Bond values are affected by changes in interest rates and the bond issuer's creditworthiness. Bonds that offer the potential for a higher income typically have a greater risk of default.

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