Going Anywhere for Diversification with Lower Volatility
Skip to main content
pilogo-NEW
Subscribe
  • Subscribe
  • My Account
  • login
  • NEWS
    • Asset owners and the coronavirus
    • Alternatives
    • Consultants
    • Coronavirus
    • Defined Contribution
    • ESG
    • Frontlines
    • Hedge Funds
    • Investing / Portfolio Strategies
    • Money Management
    • Pension Funds
    • People Moves
    • Private Equity
    • Real Estate
    • Searches & Hires News
    • SECURE Act
    • Special Reports
    • WorldPensionSummit
    • Ron Schmitz
      Pandemic drives faster transition for Virginia to private markets
      Mubadala Investment Co. logo
      Mubadala draws on portfolio in coronavirus fight
      T.J. Carlson
      Texas Muni reduces downside risk during pandemic, finding opportunities now
      Scott Davis
      ‘Triage plan’ at Indiana system helped stem losses
    • BentallGreenOak agrees to acquire Metropolitan Real Estate Equity
      watch video
      0:45
      Private funds weathered 2020 turmoil
      Daniel McHugh
      Aviva Investors promotes from within for real assets CIO
      Marc Rowan
      More alts managers seek expansion to retail market
    • Kieran Mistry
      Hymans Robertson picks head for new non-traditional risk transfer unit
      Troy Saharic
      NEPC brings on director of new business development
      Bill Foley
      Foley-backed SPAC agrees to $7.3 billion deal with Alight
      Jason Schwarz, chief operating officer of Wilshire,
      New owners have big plans for future of Wilshire
    • OMERS CEO Blake Hutcheson
      OMERS records worst loss since 2008 on bad COVID-19 bets
      Mitchells & Butlers turns off tap on pension contributions until April
      Jerome Powell, chairman of the Federal Reserve, adjusts his glasses during a Senate Banking, Housing and Urban Affairs Committee hearing in Washington on Sept 24, 2020.
      Powell says Fed will hold steady during economic recovery
      Institutional investors mobilize for equitable global COVID-19 response
    • Database’s debut focuses on public-sector DC plans
      DC plan sponsors differ on need for annuities – survey
      Biden’s retirement idea getting the cold shoulder
      Few participants tapped savings to weather pandemic – Vanguard
    • Emissions from a smokestack in Poland
      Asset managers facing more scrutiny on ESG issues – report
      Boris Johnson, U.K. prime minister, hosts the U.N. Security Council's virtual meeting on climate change risks in London on Feb. 23, 2021
      Progress in fighting climate change falls short – U.N.
      Justin Trudeau, Canada's prime minister, smiles during a virtual joint news conference with U.S. President Joe Biden in Ottawa on Feb. 23, 2021
      U.S. joins forces with Canada on climate change
      Signage is displayed at Harvard University Health Services in Cambridge, Mass., on April 20, 2020
      Harvard endowment’s fossil-fuel investments drop to 2% of assets
    • Spirit winners
      Prudential honors young people who are helping out
      2 U.K. pension execs take on ESG investing in new podcast
      Donation illustration
      Jefferies will use trading commissions to do good
      Michael Arougheti
      SPACs ride wave as latest investment darling
    • Robert 'Rob' Shafir listens during a Senate Permanent Subcommittee on Investigations hearing in Washington on Feb. 26, 2014
      Sculptor hedge fund hits sixth straight year of outflows
      The WallStreetBets forum on the Reddit Inc. website on a laptop computer and the GameStop logo on a smartphone in an arranged photo.
      GameStop frenzy has hedge fund managers rethinking next moves
      Gabe Plotkin, chief investment officer and portfolio manager of Melvin Capital Management, speaks during the Sohn Investment Conference in New York on May 6, 2019
      Citadel, Point72 back Melvin with $2.75 billion after losses
      Shanghai skyline
      Global hedge funds struggle even in a more open China market
    • Illinois Teachers chalks up $1.3 billion in investments, commitments
      Emissions from a smokestack in Poland
      Asset managers facing more scrutiny on ESG issues – report
      Indiana chooses PIMCO for emerging markets debt
      Boris Johnson, U.K. prime minister, hosts the U.N. Security Council's virtual meeting on climate change risks in London on Feb. 23, 2021
      Progress in fighting climate change falls short – U.N.
    • Margaret Anadu
      GSAM chooses global head of sustainability and impact
      Signage for AMP Ltd. adorns the top of a building in the Docklands area of Melbourne on May 10, 2018
      Ares, AMP eye joint venture
      Thasunda Brown Duckett
      TIAA appoints Thasunda Duckett as president and CEO
      Brightwood Capital adds senior investment professional
    • Thomas Spencer
      Oklahoma Teachers chief Tom Spencer to retire
      Swedish flags fly from a tourist souvenir shop in Gamla Stan in Stockholm on March 26, 2020
      Sweden’s AP1 gains 9.7% in 2020
      CDPQ returns 7.7% in 2020
      Cleveland-Cliffs to pour $202 million into pension plans in 2021
    • Thomas Spencer
      Oklahoma Teachers chief Tom Spencer to retire
      Margaret Anadu
      GSAM chooses global head of sustainability and impact
      Doug Heron
      Lothian Pension Fund to lose CEO this year
      Correction: PGIM Real Estate
    • Carlyle secures $4.1 billion ESG-related credit facility
      Hamilton Lane raises $3.9 billion for fifth secondary fund
      PSG closes first Europe-focused fund at $1.5 billion
      Kohlberg closes latest private equity fund at $3.4 billion
    • Sebastiano Ferrante and Jocelyn de Verdelon
      PGIM Real Estate turns to staff to fill new roles
      European managers key in on specialist strategies
      Ingrid Jacobs
      Jones Lang LaSalle brings on head of diversity and inclusion
      EQT inks deal to buy real estate manager
    • Neal and Brady
      Retirement security could be only issue both sides accept
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
      Shawn O'Brien
      Annuities coming to target-date funds, but not right away
      David Ireland
      Sponsors returning to questions about in-plan annuities
    • Charging Bull, sometimes referred to as the Wall Street Bull or the Bowling Green Bull, a bronze sculpture that stands on Broadway just north of Bowling Green in the Financial District of New York City
      Top-performing managers Q4 2020
      P&I 1,000 largest retirement plans: 2021
      Retirement in emerging markets
      Outlook 2021
    • U.S. still a key market for investors
      Collected coverage of P&I's 2020 WorldPensionSummit
      Pedestrians pass a large advertisement on the Arndale Center shopping mall reading 'Act now to avoid a local lockdown' in Manchester, England
      COVID-19 puts new opportunities and risks on the agenda - WPS panelists
      Screens display stock price information over the trading floor of the NYSE Euronext exchange in Paris
      Private assets will continue to grow in portfolios – WPS panelists
  • Data
    • Research Center
    • Searches & Hires Database
    • Searches & Hires News
    • RFPs
    • Charts / Infographics
    • Sponsored Research
    • Trackers
    • Q2 2020 searches and hires overview report
      Q2 2020 money manager M&A activity summary
      Q2 2020 legal overview report
      Q1 2020 searches and hires overview report
    • Illinois Teachers chalks up $1.3 billion in investments, commitments
      Indiana chooses PIMCO for emerging markets debt
      New York Deferred Comp plan re-ups with Goldman as stable value manager
      Ann Arbor Employees taps Artisan Partners for international equities
    • Illinois Teachers chalks up $1.3 billion in investments, commitments
      Indiana chooses PIMCO for emerging markets debt
      New York Deferred Comp plan re-ups with Goldman as stable value manager
      Ann Arbor Employees taps Artisan Partners for international equities
    • Emerging Market Equity Manager Services
      Securitized Credit Manager Search
      Private Placements Asset Manager Search
      Actuarial Consultant Search
    • Taiwan Semiconductor’s No. 1 in the emerging markets book
      U.S. fixed-income returns post another positive year
      Nasdaq delivers an impressive year
      U.S. dollar's recent decline continues
    • Institutional Investors: Shared Expectations, Divergent Paths
      Global Investor Study 2016
      Workplace Financial Wellness
    • U.S. Endowment Returns Tracker
      Pension Fund Returns Tracker
      Earnings Tracker
      Corporate Pension Contribution Tracker
  • Insights
    • Opinion
    • White Papers
    • Industry Voices
    • Letters to the Editor
    • Partner Content
    • Publisher's Update
    • Tesla cartoon
      Don’t confuse wealth creation with retirement saving
      Top 1000 cartoon
      Top 1,000 retirement plans weather storm just fine
      Infrastructure cartoon
      You must go big on infrastructure, Mr. President
      Retirement cartoon
      Hopes rising for retirement readiness in 2021
    • Shifting DC Times – Winter 2021
      Bond ETFs show maturity during Covid market mayhem
      Pension Consolidation: Optimizing Scale and Maximizing Efficiency
      China is embarking on a new stage of growth
    • David Blitzstein
      Commentary: Without a national retirement policy, Americans face a future of pension crises
      Lawrence Cunningham
      Commentary: Gensler should keep Clayton’s pragmatic proxy adviser rules
      My-Linh Ngo
      Commentary: Pension funds and the role of the debt market in the fight against climate change
      Bill Peressini
      Commentary: Carbon’s elemental role in the future of impact investing
    • Writer using a typewriter
      OCIO industry needs to adopt GIPS
      Writer or journalist workplace. stock illustration
      Even as it assails China, Trump administration emulates it
      Skeptical of Main Street support for proxy adviser proposal
      Focus on manager diversity pushes asset owners’ to walk the talk
    • P&I Content Solutions
      How will gold react?
      To people shaking hands
      P&I Content Solutions
      Lessons From 2020: Today’s OCIO Model Passes a Major Test of Governance
      Sponsored Content By MassMutual
      Leveraging Data to Manage Risk
      Sponsored Content By iShares
      ETFs are becoming a cornerstone of insurance equity portfolios
    • Help us help you by supporting quality journalism
      You Must Believe in Spring
      Everything Must Change
      Tomatoes & Investments
  • Multimedia
    • Videos
    • Webinars
    • Polls
    • Slideshows
    • Charts / Infographics
    • watch video
      0:45
      Private funds weathered 2020 turmoil
      watch video
      0:59
      Secure choice and other retirement plans at a state level
      watch video
      3:33
      P&I 1,000 by the numbers 2021
      watch video
      1:33
      A look at hiring activity in 2020
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      Technology is the New Oil: The Changing Nature of Emerging Markets
      Powering the Change: The power of diversity and inclusion
    • POLL: Working after the pandemic
      POLL: The year ahead for the 1,000 largest U.S. retirement funds
      POLL: The Biden administration’s economic plans
      POLL: Retirement issues in 2021
    • view gallery
      9 photos
      Coronavirus and the markets
      view gallery
      22 photos
      The 1,000 largest retirement funds: 2020
      view gallery
      10 photos
      Outlook 2020
      view gallery
      10 photos
      2019 as seen through the eyes of Roger
    • By the Numbers for February 2021
      Top Performing Managers of Managed Domestic Broad-Market Fixed Income, 4th Quarter 2020
      Top Performing Managers of Stable Value Fixed Income, 4th Quarter 2020
      Top Performing Managers of Convertibles, 4th Quarter 2020
  • Events
    • Conferences
    • Webinars
    • Defined Contribution Spring Virtual Series
      DC Investment Lineup Virtual Series
      ESG Investing Virtual Series
      Private Markets Virtual Series
    • Emerging Markets: Expanding Investors’ View
      2021: A Fixed Income Odyssey
      Technology is the New Oil: The Changing Nature of Emerging Markets
      Powering the Change: The power of diversity and inclusion
  • Careers
  • Research Center
MENU
Breadcrumb
  1. Home
  2. Custom Media
June 15, 2015 01:00 AM

Going Anywhere for Diversification with Lower Volatility

David Millar, Head of Multi Asset and Portfolio Manager for Invesco Global Targeted Returns, explains why true diversification can be hard to find.

Sponsored Content
This content was paid for by SPONSORED.
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    David Millar

    Head of Multi Asset

    Invesco Perpetual

    Can you describe your team's investment philosophy?

    We have two very separate but equally important planks to our philosophy. The first is to have an unconstrained research agenda, and the second is to have a robust risk management process. We are seeking to maximize the amount of diversification to deliver good long-term risk asset returns at lower volatility than other investment methods may provide.

    The unconstrained research agenda is all about looking for good long-term investment ideas, wherever they might arise, and not at all about starting with any preconceived notion of which asset class you should use to express them. Each of those ideas must be seen as potentially delivering a positive return on a two- to three-year view based on our central economic scenario.

    How does this translate into an investment process?

    Finding the investment idea is the first step of the process. We have ideas that we develop on our desk independently, ideas that we develop in conjunction with our colleagues here in the U.K., in the U.S. or globally, as well as those from external sources. Once those ideas are approved and on our menu of investment ideas, we move on to the second step of the process.

    The second step of the process focuses on risk. Because of the unconstrained nature of the research process, you need to make sure you understand the potential for diversification so you can ensure you're taking enough risk while attempting to deliver the promised returns. Every idea will have an amount of independent risk, which is just the volatility of the idea multiplied by the size of the holding. So we know how much of a contribution that idea can make. But it's also important to know what the risk impact is of that idea on the rest of the portfolio. A critical risk measure shows how all the ideas interact.

    How would you characterize your investment style?

    The strategy is called Global Targeted Returns. It's an explicit risk and return strategy that aims to achieve 5%-over cash returns with less than half the volatility of the equity market, both over three-year rolling periods. But if you want the strap line, it's just about “investing in ideas.” It's a combination of good long-term investment ideas with a low volatility approach.

    Which has the effect of limiting the volatility of the portfolio?

    This kind of investing is all about limiting volatility. We're judged on two explicit conduits. One is whether we reach our target return. But we will also be judged on whether we achieve that with less than half global equity volatility. With global equity volatility so low since the turn of the year, that's been a challenge.

    Can you explain the specifics of your investment process?

    It's about trying to see through short-term noise to get to a long-term theme. It's not about jumping on the next market trend. Let's take a straightforward theme: the health of the global corporate sector. The U.S. has done well, but is pausing for breath at the moment. Europe at long last is getting some benefit from lower oil prices and the weakening of the euro. We think the global corporate sector will continue to benefit. That's an idea that just reflects our view on the overall economy.

    So how could we implement that idea? For each theme, there needs to be a reason in words as to why this is a good long-term investment idea. Why do we believe it will deliver a positive return in our central economic thesis over a two- to three-year view Then we move to the analytics, which include valuation. We also look to our colleagues to get their views. One of the reasons that I and my colleagues came to Invesco was the breadth and depth of the investment expertise globally. We wanted the opportunity to leverage that long-term thinking. So we debate ideas with our colleagues. We don't always agree, but we always have the discussion.

    In this case, we recommended that it should be expressed by buying global equities. Clearly, this is a risk-on idea. We also utilized Invesco's bottom-up stock selection capabilities, because the analytics indicated that some markets were fully valued.

    How long would you generally stay invested in a particular idea?

    We always assess ideas on the basis that they produce the required return in two to three years, but we don't always get that right. Markets can move quickly. But the point is that we are prepared to hold for that two- to three-year period because we believe the value will come out over that time. Typically, we expect to see turnover of about one-third of the 20 to 30 ideas in our portfolio in any year. Some may stay there indefinitely as long as the central economic view supports them.

    If the markets change, though, we can change our minds. But the important point is that we go back to the process. We never short-circuit the process, because it's all about the balance in the portfolio. For instance, we're short the euro. But it took us until April and May last year before we thought the conditions were right to do this, even though the economics said that the euro needed to weaken and the valuation said that it was overvalued. The behavioral analytics, though, suggested there were too many buyers. So we waited until the central banks stopped diversifying their dollars into euros.

    Our target for the euro was $1.25, after we invested close to $1.40. But we clattered through that to $1.24 in a matter of months. So we return to the process and look at it afresh. Do we believe that the idea still has a two- to three-year time horizon?

    How often do you reassess the portfolio this way?

    We have a regular review of all of the ideas. Every month we review at least a third of them alongside new ideas that are brought to the table. Even if not much is happening, every idea will be reviewed at least once a quarter. Sometimes, we may review more. For instance, we reviewed 80% of the ideas in January because of the unprecedented fall in oil prices. That changed the whole macro landscape. You can't ignore that. But the response was to go through our ideas and refresh our thinking because we couldn't wait for the next quarterly cycle of reviews.

    How do you assess the relative attractiveness of one idea compared to another?

    In our weekly meetings, we review the entire portfolio both for general care and maintenance, but also to ensure that we are getting what we believe to be the best combination of those ideas. We add in the information that we are getting from the risk modeling side and have a discussion as to whether we'd like to substitute one idea for another that's on the menu.

    How important is the lack of constraint to this investment approach?

    It's the heart of our philosophy. We believe you get greater diversification by removing those investment constraints. We have access to a larger toolkit than just traditional asset classes. We can express ideas through volatility, currency, inflation—including using pair trades that allow you to go long one market and short another. However, I've learned that once you think you have the perfect diversifying portfolio, you need to look for new diversification because sources of diversification will keep changing over time.

    What's important here is that investment opportunities don't start with labels on them. Say you want to have a view on the Australian economy because of the slowdown in mining and the potential weakening of a strained economy. That's the idea.

    Then you have the question of how to express that idea or theme. Do you want to sell Australian equities or sell the Australian dollar? These are choices you make later. You start with the idea and the choice of implementation can come second. That does turn the traditional balanced investing-asset allocation model on its head a bit.

    To me, the removal of those constraints and the freedom to look for ideas is absolutely critical. But there's a reason behind it—because it allows us to search for greater diversification than investors have likely experienced before.

    CO100030612.PDF

    Invesco Inv Ins spread

    CO100030612.PDF >
    sponsored
    Events
     
     
    Sponsored
    White Papers
    Shifting DC Times - Winter 2021
    Bond ETFs show maturity during Covid market mayhem
    Pension Consolidation: Optimizing Scale and Maximizing Efficiency
    China is embarking on a new stage of growth
    GP-LED OPPORTUNITIES AT THE SMALLER END OF THE MARKET
    Gold Outlook 2021
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    pilogo-NEW
    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    150 N. Michigan Ave.
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2021. Crain Communications, Inc. All Rights Reserved.
    • NEWS
      • Asset owners and the coronavirus
      • Alternatives
      • Consultants
      • Coronavirus
      • Defined Contribution
      • ESG
      • Frontlines
      • Hedge Funds
      • Investing / Portfolio Strategies
      • Money Management
      • Pension Funds
      • People Moves
      • Private Equity
      • Real Estate
      • Searches & Hires News
      • SECURE Act
      • Special Reports
      • WorldPensionSummit
    • Data
      • Research Center
      • Searches & Hires Database
      • Searches & Hires News
      • RFPs
      • Charts / Infographics
      • Sponsored Research
      • Trackers
    • Insights
      • Opinion
      • White Papers
      • Industry Voices
      • Letters to the Editor
      • Partner Content
      • Publisher's Update
    • Multimedia
      • Videos
      • Webinars
      • Polls
      • Slideshows
      • Charts / Infographics
    • Events
      • Conferences
      • Webinars
    • Careers
    • Research Center