A whole generation of investment managers – and some central bankers – are navigating an economic landscape they have never experienced before.
Anyone under the age of 40 who is managing money, tasked with allocating assets and constructing investment portfolios could be in for a rude awakening.
The deleveraging of the global economy is upon us. Interest rates, while still very low on a 30-year horizon, are as high as they have been since May 2012.
If an ambitious 25-year-old analyst in 2012 managed to rise through the ranks to become a portfolio manager by the age of 30 they would be 36 today and putting money to work with no professional experience of a rising interest rate environment.
Even those aged 40 would only have seen the relatively conservative 150 basis point hike from 2009 to 2010. Any PMs who started out in 2011 would have watched markets react to the cash rate’s decade-long descent from 4.75 per cent to 10 basis points.
Piers Bolger, chief investment officer at Infinity Asset Management, started his career in the early 1990s. The cash rate plummeted from 17.5 per cent in 1990 to 4.75 per cent in 1993. He also witnessed the 275 basis point hikes over the final six months of 1994, the monetary tightening of 2000 and the slow ascent to 7.25 per cent in August 2008.
“There are people who have been in the industry for 10 or 15 years who might think they are very experienced but they haven’t actually seen an environment like we have today,” Bolger said.
Speaking on an upcoming episode of Relative Return, the CIO said even some central bankers are experiencing (and making calls on) monetary tightening for the first time.
“We’ve seen the impact that rising rates have had on bond markets. If you look at 2022 and the performance of asset classes, interest rate sensitive sectors were the worst performing asset classes by a quantum and I think really challenged the asset allocation framework for a lot of investment managers,” Bolger said.
“Bonds are typically seen as defensive but they were anything but through 2022. You did see some skewness in portfolios over the last decade as rates continued to trend lower over time.”
A golden era for active management?
While ETFs and other passive strategies have performed well in a low-rate environment, the new cycle is turning investor towards the real value of active management.
Bolger said Infinity’s active approach is primarily about managing risk. As the investment manager for financial advice group Viridian, Infinity manages over $3 billion in AUM across more than a dozen managed account portfolios for advisers and their clients.
“From our perspective it is about trying to understand the market environment that we’re in, looking at the tools available to us to manage the risk within that market environment and from there putting together a strategy that is forward looking and hopefully in the context of that deliver investment returns,” he said.
“Rising interest rates are recalibrating the way you can think about asset allocation and building investment portfolios.”
The former BT and UBS manager says we have come out of an environment where being levered into equities has been the best way to play the last decade.
“Now we’ve got an environment where bond yields are anywhere from 4.5 per cent plus, depending on where you are on the curve. That’s equivalent to what you are getting on dividend yields. So that is allowing you a little bit more flexibility in the context of portfolio positioning,” he said.
“Duration starts to come into play as well in terms of management of fixed income.”
Despite the challenges, he sees the new era of investment management as a positive one that aligns with actively managed account portfolios.
Listen to the full Relative Return episode with Infinity Asset Management CIO Piers Bolger this Thursday on the Financial Services Podcast Network.
