One of the themes that ran through the recent Russell Investments institutional summit was the growing emphasis on dynamic investing, evidence of a willingness among investors to vary their strategic portfolio positions in response to changing market conditions.
Dynamic investing: because the world is not a machine
At the event, we heard from representatives of large institutional programs who have adopted more dynamic positioning within the past few years: a big “thank you” to Greg Henry of Southern California Edison and Don Pierce of San Bernardino County Employees Retirement Association for sharing their approaches and experiences. We heard too from some of those responsible for dynamic positions within the portfolios managed by Russell Investments: Rob Balkema (of the multi-asset team), Keith Brakebill (fixed income) and Megan Roach (equities.) Megan explains that behind this increased emphasis is the belief that “our clients are best served when we not only pick great managers but go beyond that to dynamically manage total fund level exposures in a more purposeful way.”
Personally, I see this trend as connected to a changing view of the nature of markets. If you think of investment markets as a simple machine, with some long term underlying normal state—an equilibrium—and fluctuations around that, then it’s easy to regard dynamic investing as just market timing. And market timing is difficult.
But if you think of investment markets as a turbulent uncertain system, then it makes much less sense to try to fix a long term policy and then pay no attention to the changing landscape. As Don put it “a 60/40 portfolio cannot possibly be right at every price.”
More than one way to go about it
One thing that was clear from the various discussions is that there’s more than one way to go about dynamic investing. The details of the objectives being pursued vary, as do the underlying philosophies and the decision-making structures within the programs.
For example, Russell Investments’ approach is formally structured to draw on five sources of input: the firm’s strategic beliefs about factors such as value or credit exposure; the current views of the asset class teams; the views of the strategist team; the views of third-party asset managers; and quantitative indicators of the state of the economic cycle, market valuations and investor sentiment.
Governance—the allocation of responsibilities and the decision-making structure—needs to be thought through carefully. While the most effective risk management is to be right, no program will outperform all of the time. So positions need to be sized appropriately in the context of the wider program, avoiding too heavy a concentration of risk in a single position.
A clear governance structure not only improves the odds of success, it also means that during the inevitable periods of disappointing performance, there is more likely to be wider buy-in to the long-term value of the program. It’s worth the effort of ensuring that all stakeholders understand the approach and have realistic expectations—doubly so if there is turnover among board members.