Wolle: The flexible nature of multi-asset investing offers a tremendous range of options to achieve these objectives, depending on the strategy and manager. For example, the Invesco Balanced-Risk Allocation strategy (IBRA) pursues a full-cycle target return of 6% above three-month U.S. Treasurys, with 8% volatility. The result is low to moderate correlation to traditional financial markets by focusing on economic diversification to optimize allocations across equity, fixed-income and commodity markets.
In a traditional balanced portfolio of 60% stocks and 40% fixed income, as much as 90% of portfolio risk can come from the equity allocation, which is not that balanced. While stocks do well in noninflationary growth environments, they can struggle during other phases of the economic cycle. The IBRA strategy includes long-duration government bonds to serve as a shock absorber during recessions or periods of crisis, and commodities help defend the portfolio during inflationary growth periods.
While economic diversification provides a solid foundation, the strategy is also more flexible than a traditional balanced portfolio. We take a more adaptive approach, recognizing that the phases of the economic cycle can be long, which allows us to increase exposure to assets during more favorable times and to reduce exposure during less favorable times. Systematically rebalancing these strategic and tactical allocations monthly has helped the strategy meet its long-term volatility targets. Since inception, the strategy has demonstrated low correlations of 0.7 and 0.3 to global equities and U.S. fixed income, respectively.
Millar: The Invesco Global Targeted Returns strategy (GTR) takes a different approach, breaking from traditional asset allocation models to pursue absolute returns through an idea-driven portfolio. The strategy seeks to deliver an annualized return of 5% above three-month U.S. Treasurys with less than half the volatility of global equities over rolling, three-year periods. The portfolio typically has between 20 to 30 investment ideas that the team has developed by searching globally across all assets, geographies, sectors and currencies for attractive investment opportunities that can provide the best blend of risk and return. These ideas are then applied using what the team believes is the best implementation route from a variety of asset types and instruments that range from commodities to credit, equities, currencies, inflation, interest rates and volatility.
For example, one current idea is around equity dispersion. Correlations for individual stocks vs. their relative equity indexes have begun to fall, indicating greater return variance across securities and less reliance on the broad momentum-based returns that have tended to dominate equity markets since the 2008 economic crisis. Our research indicates that this trend should continue, and we implement this view through an options-based index that captures the volatility of a basket of constituents from the S&P 500 and Euro Stoxx 50 indexes that rise relative to the indexes themselves.
The team can also look across asset classes for ideas. In an emerging markets carry idea, for example, the team takes advantage of the carry available from two currencies, the Brazilian real and the Mexican peso vs. the U.S. dollar, and pairs them with a short position in the relative country equity indexes.
Each idea is selected to deliver an independent, positive return to the portfolio over a two- to three-year time horizon and is sized based on its return potential and its assessed volatility under various economic scenarios, both in isolation and in relation to other ideas. Collectively, the team looks to derive a strong consistent hit ratio, with the majority of the ideas delivering incremental returns to the portfolio and no single idea or risk exposure dominating. This gives investors access to many diversified return streams, which historically has positively skewed monthly portfolio return distributions while avoiding extreme negative performance.
