Why portfolios don’t deliver outcomes?
There are at least six reasons and hidden risks that are potentially affecting the outcomes of portfolios, according Northern Trust Asset Management ‘Risk Report’.
The first reason, according to the report, was that institutions had on average nearly two times more uncompensated than compensated risk which meant that investors were simply not being paid for the risks they were taking as overcrowded with uncompensated risks portfolios tended to dilute the potential for excess returns.
The second most important risk was the fact that underlying portfolio holdings cancelled each other out and hurt performance. This was often the result of investment managers within a portfolio taking opposing positions, essentially offsetting one another.
Other risks included hidden portfolio risks, such as one intentional style factor bringing unintentional exposure, conventional style investing led to index-like performance with higher fees, over-diversification diluted performance or possible attempts to “time” manager outperformance may have proved costly.
“Anytime someone invests, they do so with a specific goal – an outcome – in mind. We appreciate that investing ultimately serves a greater purpose – and believe it should be done intentionally and as efficiently as possible,” Northern Trust chief investment officer Bob Browne, said.
“This research demonstrates how underlying investments can inadvertently cause a drag on portfolios. And it’s especially timely for all types of investors in today’s environment given most we speak with have a heightened emphasis on finding and addressing hidden risks.”
Northern Trust Asset Management head of quantitative strategies, Michael Hunstad, said: “Really understanding how a manager will interact with the rest of your portfolio, and efficiently combining different strategies, managers and factor styles, is essential to constructing a portfolio that has the potential to deliver as intended – rather than delivering unexpected results”.
AUTHOR
Oksana Patron
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