THE DAYS of set-and-forget portfolios are over and successful investing today requires actively managed defensive strategies, says Vimal Gor, who heads up Pendal’s Bond, Income and Defensive Strategies team.
Traditional investment wisdom says investors can run a portfolio with 60 per cent equities and 40 per cent bonds and get exposure to rising markets while enjoying protection when things turn down.
But policymaker action to keep interest rates low means bonds no longer play the role they once did in a portfolio of providing income alongside downside protection, Gor says.
“People know their fixed income defensive portfolio is broken — they just don’t know what to do with it,” says Gor, speaking at Investment Magazine’s recent Absolute Returns Conference.
“They are navigating this period where the 60:40 portfolio is no longer as relevant as it was in the past.”
Gor recommends investors take a whole portfolio approach and build strategies and sub-strategies within the portfolio that perform at certain times.
“The key thing for clients is that you want to have confidence in the defensive part of the portfolio to perform when you need it.”
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The idea is to avoid an asset-class approach and recognise that defensive strategies can be found across the markets, he says.
“It’s like a new way of thinking about it. You’re not so much trying to put together types of asset classes and then getting an outcome, it’s really a focus on the outcome first.
“If the equity markets are all down, what do I need my defensive book to do? And do I have confidence that it will actually work or not?”
That approach has led Gor to use volatility as a trading strategy, adding equity volatility in recent years and even using cryptocurrency to provide defensive protection.
“It’s really about making sure we’re thinking about the whole portfolio as opposed to saying here’s a fixed income fund.”
Relying on bonds and traditional portfolio construction strategies is effectively equivalent to using old technology, he says.
“We’ve got to this point where there’s complete death for the 60:40 portfolio and if we get bond yields rallying further well then risk parity is largely dead as well.
“But then how do you think about building that defensive path?
“If you don’t use volatility and you don’t use equity vol and you don’t use strategies like intra-day momentum – these kinds of things which are proven to be defensive – well then just relying on an old product set isn’t going to get you to where you want to be.”
Vimal Gor is a portfolio manager with Pendal’s Income and Fixed Interest team.
Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia. In 2020 the team won the Australian Fixed Interest category in the Zenith awards.
With the goal of building the most defensive line of funds in Australia, the team oversees A$22 billion invested across income, composite, pure alpha, global and Australian government strategies.
Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.
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