Insight

Risk & Reward - 2nd issue 2023

Risk & Reward Q2 2023

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 analyse 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 of available 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-optimised 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.

Featured insights

Click below to read the featured articles within this edition of Risk & Reward.

  • Portfolio%20insurance%20in%20times%20of%20higher%20interest%20rates

    Portfolio insurance in times of higher interest rates

    By Alexandar Cherkezov, Carsten Becker, Moritz Brand and Bernhard Langer

    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%20and%20diversification:%20Absolute%20return%20strategies%20for%20asset%20allocation

    Liquidity and diversification: Absolute return strategies for asset allocation

    By Bernhard Langer, Carsten Rother and Dr. David Happersberger

    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%20in%20shorts:%20Shorting%20activities%20and%20the%20cross-section%20of%20stock%20returns%20around%20the%20world

    Alpha in shorts: Shorting activities and the cross-section of stock returns around the world

    By Hao Zou, Ph.D., and Jerry Sun, Ph.D.

    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 capitalisations.

  • Don’t be blind just because a benchmark is Paris-aligned

    By Joshua Kothe, Erhard Radatz, Andre Roberts and Carsten Rother

    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%20optimal%20equity%20portfolio%20transition

    Tax optimal equity portfolio transition

    By Nikunj Agarwal, Tarun Gupta, Ph.D., Jacob Guan and Josh Rogers

    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.

Investment risks

  • 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.

Important Information

  • Data as of June 30, 2023 unless otherwise stated.

    This document has been prepared only for those persons to whom Invesco has provided it. It should not be relied upon by anyone else. Information contained in this document may not have been prepared or tailored for an Australian audience and does not constitute an offer of a financial product in Australia. You may only reproduce, circulate and use this document (or any part of it) with the consent of Invesco.

    The views contained in this statement are those of the author and are based on information known at the time of publication. That information may change. You should not rely on this statement in making an investment decision about any security but should make your own independent enquiries.

    The information in this document has been prepared without taking into account any investor’s investment objectives, financial situation or particular needs. Before acting on the information the investor should consider its appropriateness having regard to their investment objectives, financial situation and needs.

    You should note that this information:

    • may contain references to dollar amounts which are not Australian dollars;
    • may contain financial information which is not prepared in accordance with Australian law or practices;
    • may not address risks associated with investment in foreign currency denominated investments; and
    • does not address Australian tax issues.

    Issued in Australia by Invesco Australia Limited (ABN 48 001 693 232), Level 26, 333 Collins Street, Melbourne, Victoria, 3000, Australia which holds an Australian Financial Services Licence number 239916.

    © Copyright of this document is owned by Invesco. You may only reproduce, circulate and use this document (or any part of it) with the consent of Invesco.