“Diversification is the only free lunch,” stated Harry Markowitz, the Nobel Prize-winning economist best known for developing Modern Portfolio Theory.
The quote was one of a collection included in a book provided to attendees at the 12th annual Investment Forum, South Africa’s premier thought leadership event for investment professionals.
The Markowitz quote is particularly apposite given the current economic and financial market climate, with the challenge it poses to investors to a) safeguard capital and b) achieve robust risk-adjusted returns where possible.
A diverse debt portfolio was one play advocated by the conference speakers. Another is to tap into the opportunities provided by private markets, with their long-term return potential and ability to smooth volatility.
That message has certainly taken hold across the investment community. Private market assets under management have gone from strength to strength, according to McKinsey’s latest Private Markets Annual Review, with fundraising and deal activity continuing to flourish.
Private equity remains the highest-performing private markets asset class, noted the McKinsey report, with a pooled internal rate of return of 27% in 2021. Private debt fundraising has grown every year since 2011, including through the pandemic, its cyclical fundraising resilience helped by the diversity of private debt sub-strategies. Infrastructure—with its potential for uncorrelated, income-driven returns and inflation protection—also set records for fundraising, AUM and deal volume in 2021.
Invest for the long term
Another message reiterated by speakers across the two-day event was: Don’t Panic.
Rampant inflation, Covid disruptions, the Ukraine war and recessionary fears paint a pretty glum backdrop. But all this will pass. The key for investors is to play the long game with their holdings.
As another quote included in our attendees’ book—this one by Nobel Prize-winning American economist Paul Samuelson—observed: “Investing should be like watching paint dry or watching grass grow. If you want excitement take $800 and go to Las Vegas.”
Take 10-year South African bonds, which have a yield hovering around 10.50% at the moment. But because they are so cheap, the argument went, investors who stay patient and invested will make money over the long haul. In that sense, it is actually a safer, and more profitable, investment than a G7 government bond.
Volatility and distressed assets will also throw up opportunities for the patient and the brave. As Oaktree Capital founder Howard Marks put it, “the safest (and most rewarding) time to buy usually comes when everyone is convinced there’s no hope.”
Know your value
An investment philosophy based on diversification and playing the long game may be the secret to weathering the current environment (and indeed profiting in any market conditions), but to be effective some other fundamentals need to be in place.
First, informed investment decisions depend on having a clear picture of what you’re holding. That means knowing the value of your assets at all times.
Yet we still commonly see investors relying on multiple, asset-specific systems—or worse, spreadsheets—to value their portfolios and track their exposures. The result: fragmentation and manual workarounds, producing errors, data inconsistencies, multiplied costs and operating inefficiencies.
As I discussed with attendees at the conference, SS&C Advent is well-placed to help here. The Geneva portfolio management, accounting and reporting platform’s multi-asset class coverage supports any investment within any structure for any region in the world. The Investment Book of Record (IBOR) provides a comprehensive, timely view of portfolio data across an entire firm, with daily NAV calculation so users always know the value of their portfolio. Plus users can manage their risk thanks to comprehensive scenario analysis and stress testing across fixed income, equity, foreign exchange, credit, commodity and derivatives markets.
Research the market
Making informed long-term investment decisions also depends on the quality of your company and market research. What do you plan to invest in? What are your target companies’ growth plans and prospects? How will they fare as market conditions change? But keeping track of the mountains of information investment managers are deluged with today, so they can base their investment decisions on the factors that matter most, is a huge challenge.
The SS&C Advent Tamale research management solution serves as a centralized knowledge repository. By capturing and organizing all your internal and external data in one place, investment teams can easily find and share key information—allowing them to spend their time collaborating on ideas and making better investment decisions, instead of searching for data.
Advent Genesis—a cloud-based portfolio management platform designed to streamline portfolio construction, modeling and rebalancing—then allows portfolio managers to optimize those investment decisions for the long term. Users can create and play around with models in line with different scenarios, giving them the flexibility to assess the impact of prospective investment decisions without affecting the actual portfolio. Any subsequent account rebalancing against the models is automated and takes just minutes, making it easy for firms to implement adjustments as market conditions change.
Look after the business
Along with their portfolios, now is the time for investment firms to focus on optimizing their operating models as well. Long-term cost and margin pressures will only become more acute as industry conditions deteriorate, increasing the onus on managers’ internal flexibility, stability and efficiency.
Replacing the heavy fixed costs of an in-house infrastructure and operational support team with the lighter footprint of a variable cost outsourcing provider is a tried-and-tested way to improve the economics of the business. A dedicated third-party provider can also bring much-needed operational robustness during periods of heightened market stress. Multi-market capabilities give managers a ready-made platform to expand into new sectors as opportunities allow too.
Just make sure you pick a partner with the experience and financial strength to weather whatever volatility is coming our way, and that can support your business for the long haul, whichever direction you take.