The role and modernisation of risk management in discretionary multi-asset investing

Introduction
The importance of risk management has become ever more pronounced in the aftermath of the Global Financial Crisis (GFC). In an effort to spur their economies out of recession and raise risk assets out of a lost decade of returns, developed central banks pulled interest rates to historical lows and, thereby, extended the secular bull market in bonds.
In this post-GFC world, investors have broadened their investment universe to find alternative sources of both return and risk mitigation. This has led to a modernisation of risk management that is more suitable to an investment approach that goes beyond a traditional stock and bond portfolio.
The focus of this paper is to explore the role of quantitative analysis within the realm of discretionary portfolio management, where humans – rather than models – ultimately make capital allocation decisions, specifically within a multi-asset investment framework. In this type of qualitative approach, risk management is necessary for robust portfolio construction. The opportunity set for multiasset portfolios crosses asset classes, geographies, sectors and currencies. Hence, there are many relationships that should be considered by portfolio managers to take risks efficiently.
Furthermore, aiming to deliver a positive, absolute return in all market conditions shifts the role of risk management from a policing and ex-post analysis function versus a benchmark to one of active involvement in the portfolio construction process. In our view, the analysis and dialogue regarding investment risk is optimal when a risk management expert sits within the investment team and among the portfolio managers to ensure constant and iterative interaction. In this paper, we explore the tools and considerations that comprise our on-desk risk management process, which we believe is essential for enabling a portfolio management team to thoughtfully take risk to garner returns.
Related Articles
Important Information
-
The opinions expressed are those of Benjamin Jones as of November 30, 2021, and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
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 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.