Periodically, institutional investors are required to report the values of their portfolio investments to their investors. The goal, of course, is to show an increase in the portfolio’s value. However, investing for growth while also managing risk is a tough equation.
Many strategies that seem balanced are too inflexible to optimize growth and minimize volatility long-term. As a result, many investors fall prey to strategies that increase risk over time, or, conversely, ones that do not allow additional risk allocation when it is advantageous. These five strategies can help institutional investors increase their portfolio valuations by embracing diversification and actively managing risk:
The rigidity and narrow focus of popular strategies (such as a factor-oriented, low-volatility equity strategy) can result in several challenges: underperformance in certain market conditions, crowding, and interest rate sensitivities. While such strategies are growth-oriented and designed with some protection relative to the market, they open the door to other challenges.
Institutional investors are better served by actively managing a growth portfolio with a set of diversifying, positive return positions that are tailored to work together to improve the overall portfolio’s return and risk characteristics. Smart investors use absolute return strategies to diversify, investing across capital markets.
Don’t rely on the past to dictate your investment decisions. Instead, concentrate on the future. Building a forward-focused, diversified strategy involves the participation of a team of various subject matter experts.
Investment strategies should be shaped by as many different perspectives as possible: economic and risk analysts, asset class-specific expertise, industry experts, and professionals with the necessary market and geographic know-how to form a complete picture of likely future risks and rewards. A holistic and informed approach allows investors to identify the strongest return-seeking ideas that can simultaneously reduce the risk of the overall portfolio.
Leverage Enhanced Analytics
Sophisticated risk analysis tools help inform investment strategies. Simulations are an excellent way to efficiently assess market outcomes across asset classes for potential worst-case scenarios and determine impacts to an overall portfolio. Advanced analytics allow institutional investors to make such processes scalable, as well as quickly respond to unforeseen events or market changes.
Embrace Diversity in All its Forms
Diversification of asset classes, industries, geographies, long- and short-term holdings, and risk profiles are so important for institutional investors. However, investing in diverse companies is important too. It’s now proven out that great corporate decision-making is based on the consideration of different points of view from people of different backgrounds, perspectives, and experiences. Gender diversity, racial diversity, sexual orientation diversity, and socio-economic diversity in leadership is a notable indicator of corporate success, and companies with a better inclusion strategy have a competitive edge in the marketplace.
Seek Independent Valuations
While many asset managers have the ability to perform portfolio valuation analyses themselves, that approach has largely fallen out of favor. Investors, funds, and regulators prefer the opinion of independent valuation experts to avoid conflicts of interest and ensure that a wide range of opinions and expertise have contributed to value assessments. Valuation firms also help investors assess a portfolio’s future outlook, informing their investments going forward.
Actively managing a diverse, flexible, and informed investment portfolio helps to ensure that your portfolio valuation increases, making those performance reports to management and investors go smoothly.