The expectation of inflation being structurally higher for years will have an impact on portfolios and is a key part of a new investment playbook that BlackRock has constructed, Mr. Powell said. According to the asset manager's 2023 global outlook, the new playbook involves more inflation-protection assets, more granular takes on asset classes, and more frequent checks on investors' strategic asset allocation.
"We should be really clear; we are definitely not saying we should move to a structurally more trading-orientated mindset. It's still strategic- and math-driven. That's unchanged. What has changed for us is the market volatility, meaning that if you were to just check in every year or two, the markets might have moved very dramatically over that time. And you'll have gone much further away from where you want to be," Mr. Powell said. BlackRock had $8.6 trillion in assets under management as of Dec. 31.
Indeed, a BNY Mellon survey published in January found that asset owners now require an increase in the frequency and speed of reporting when it comes to portfolio performance.
"For example, if reporting used to be quarterly, it's gone into monthly, and more and more it's going daily," said Frances Barney, New York-based head of global risk solutions at BNY Mellon, in an interview during a recent trip to Singapore.
"It's really reflective of the importance of the fiduciary responsibility and the care that the investment office has with trying to achieve their investment objectives, whether it is protecting the retirement or the future of specific stakeholders," Ms. Barney said.
BlackRock is not alone in identifying the need for a new approach. Australia's A$243 billion ($168.1 billion) sovereign wealth fund Future Fund, Melbourne, released a position paper in December titled "The death of traditional portfolio construction?" The paper stated the need for fresh approaches to portfolio construction because of paradigm shifts.
These include trends such as the 30 years of globalization, Chinese growth, energy and food abundance, a peace dividend and interest rate declines that have provided tailwinds to investment returns but can no longer be relied upon, the paper said.
For example, "equities have always been the main driver of portfolio returns to long-term investors," said Raphael Arndt, CEO of the Future Fund, in a phone interview. "Apart from being fairly priced to begin with, for equities to perform, you have to have businesses that can generate earnings, so you need reasonable economic growth. And if they use leverage, you need stable interest costs."
However, there have been hurdles to economic growth globally, Mr. Arndt said. These include geopolitics, governance concerns, budget-balancing, inflation, and social or cultural changes.
He also noted that "over the next little while, and maybe that's 10 years, we think economies and markets are adjusting, inflation is going to be higher, and geopolitics will be more intrusive. … We have to keep an eye on our portfolio positionings, and we have to adjust the portfolio (as needed)."
That includes taking more possible scenarios into consideration in their risk management analyses. Even though scenario planning has always been a part of Future Fund's investment approach, the fund has found that the range of plausible scenarios today has widened notably, Mr. Arndt said.
"We could have a recession, or a deep recession, or interest rates could go too high, or there could be this policy mistake by central banks, or maybe we could have a spike in inflation that comes in stagflation, or we could have a muddle through and maybe even have a productivity boost," he explained.