Academics, economists and thought leaders in our industry agree: diversification across traditional asset classes simply is not enough to grow – or even sustain – assets over the long term.
At Balentine, we use a distinctive Building Blocks approach to asset management to help bridge the gap between what is possible in the markets and what is necessary to help our clients achieve their investment goals. Unlike traditional asset allocation, our Building Blocks approach is built with a foundation of expected risk (versus expected return). Our five unique Building Blocks help guard against “tail risks” and provide investors with a better chance of sustaining their spending needs against the need to preserve and grow capital in real terms in the future.
Manager Skill, one of our five Building Blocks, is used in our strategies to engage active management to improve upon the risk-adjusted returns we are able to generate from our Safe and Market Risk Building Block exposure. While we are biased towards the use of passive vehicles within Safe and Market Risk, we take a more unconstrained, longer-term approach within Manager Skill to afford active management the best possible chance of succeeding. Typically, we employ strategies that are not restricted to a particular segment of the market, are global in nature and can buy securities both “long” in expectation of their prices rising or “short” in expectation of their prices falling.
Whether the emphasis is more on return enhancement or risk management, Manager Skill’s role depends on the starting point for Safe and Market Risk. Given today’s unfavorable starting point and headwinds for both Safe and Market Risk, active management within Manager Skill provides a true “third leg” to the stool in our portfolios.
In particular, we are looking for active management to perform well at the extreme ends of the range of possible outcomes over the next seven years. The most difficult environment relative to our base case would be if both Safe and Market Risk exposure were to go down in value concurrently. Safe and Market Risk have become increasingly correlated in recent times, as markets have been driven by intervention and unconventional policy moves. Active management vehicles with very low correlation to equity markets are constructed to provide balance to a portfolio.
By constructing a portfolio with Manager Skill correlations closer to 0% to equity markets, portfolios are designed to have convexity with the goal of outperforming no matter what the market environment.