Managing a global portfolio in the shadow of significant event risk

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Over the last five years, global markets have performed well in the shadow of significant event risk, from the Chinese banking liquidity crisis of 2013 to the volatility caused by the threat of a global trade war (amongst other issues) earlier this year.

Having recently celebrated its fifth anniversary, the Threadneedle Dynamic Real Return Strategy has delivered a gross annualised return of 6.4% over five years to 31 August 2018. Meanwhile, over five years absolute volatility has been at a steady 4.8% – some way below the two-thirds of equity volatility target.*

The manager has achieved this through close collaboration with the group’s eight-strong Asset Allocation Strategy Group and in-house analysts, and by sticking to a disciplined approach throughout tougher time periods.

Manager Toby Nangle explains: “Our reason for using in-house funds is about joining up the investment strategy. If we used another firm’s strategy, we would have less control from a risk perspective. It also means we can keep it very attractively priced for our clients, while managers using external funds typically have higher fees.”

The portfolio is composed of direct investments, passive strategies and internal active fund wrappers. This allows the firm to keep charges competitive.

‘No neutral’

One of the key aspects differentiating the Columbia Threadneedle multi-asset strategies from its peers is the way the team approaches asset allocation. Unlike many of its peers, the portfolio is not built around a strategic asset allocation, but rather follows a dynamic unconstrained approach.

This means for real return portfolios that the minimum limit for every asset class is 0%, with allocation to equities permitted to rise up to 75%, bonds and cash to 100%, property to 20%, commodities to 20% and alternatives to 10%.

“Everything has to earn its way into the portfolio. The asset allocation is managed dynamically across the risk spectrum, from periods where we seek to protect our investors’ capital, to times where we believe risk assets will be well rewarded and as such we seek to participate in growth opportunities.”

The Multi-Asset team believes the traditional approach of combining bonds and equities in a portfolio is not necessarily the best way to improve risk-adjusted returns, citing 120 years of historic data showing that this relationship between equities and fixed income is a relatively new phenomenon.

Click here to read the full article and gain access to the exclusive Columbia Threadneedle guide to dynamic returns from fund manager Toby Nangle.

*Source: Columbia Threadneedle Investments. As at 31 August 2018. The strategy launched on 18 June 2013. Gross performance calculated offer to offer, gross of annual management charges, using Global Close prices. Equity volatility measured as MSCI World index. Please note the strategy may not achieve its investment objective. Past performance is not a guide to future performance.

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