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Preparing a Multi-Asset Class Portfolio for Shocks to Economic Growth

Eugene Podkaminer, Wylie Tollette and Laurence Siegel
The Journal of Portfolio Management Multi-Asset Special Issue 2019, 45 (2) 106-116; DOI: https://doi.org/10.3905/jpm.2018.45.2.106
Eugene Podkaminer
is the head of multi-asset research strategies within the Multi-Asset Solutions group at Franklin Templeton Investments in San Mateo, CA
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Wylie Tollette
is the head of client investment solutions within the Multi-Asset Solutions group at Franklin Templeton Investments in San Mateo, CA
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Laurence Siegel
is the Gary P. Brinson director of research at the CFA Institute Research Foundation and an independent consultant, writer, and speaker specializing in investment management in Wilmette, IL, and Del Mar, CA
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Abstract

This article explores shocks to global economic growth and how investors can defend against them. The authors examine the impact of such potential shocks on the asset allocation decision, asset-liability management, and funding sources. This article proposes that the global economy could be poised at an inflection point, and if a regime change occurs it would catch many portfolios off guard. Investors have experienced relatively healthy returns for the last decade, with recency bias leading many investors to creep outward on the risk spectrum. The authors remind the reader that, even in portfolios that appear to be diversified, most of the risk typically comes from equities and equity-like securities, which are greatly exposed to global economic growth risk. To address these concerns, they encourage investors to incorporate economic fundamentals and much longer time horizons into the portfolio construction calculus. Specifically, they argue that true diversification across independent sources of return is the only practical way of reducing exposure to economic growth. The asset classes providing returns independent of the equity market are nominal bonds and real assets (the latter including inflation-indexed bonds) and, for some investors, cash (usually implemented using skill-based assets with a cash-like beta). Many assets marketed as alternatives actually provide equity exposure in disguise.

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The Journal of Portfolio Management: 45 (2)
The Journal of Portfolio Management
Vol. 45, Issue 2
Multi-Asset Special Issue 2019
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Preparing a Multi-Asset Class Portfolio for Shocks to Economic Growth
Eugene Podkaminer, Wylie Tollette, Laurence Siegel
The Journal of Portfolio Management Dec 2018, 45 (2) 106-116; DOI: 10.3905/jpm.2018.45.2.106

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Preparing a Multi-Asset Class Portfolio for Shocks to Economic Growth
Eugene Podkaminer, Wylie Tollette, Laurence Siegel
The Journal of Portfolio Management Dec 2018, 45 (2) 106-116; DOI: 10.3905/jpm.2018.45.2.106
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  • Article
    • Abstract
    • TYPES OF SHOCKS TO ECONOMIC GROWTH
    • HISTORY AND FUTURE OF GLOBAL GROWTH
    • BEHIND THE NUMBERS
    • GUARDING AGAINST SELECTIVE MEMORY
    • POINTS OF INFLECTION
    • POSSIBLE CAUSES OF SHOCKS AND SURPRISES
    • IMPLICATIONS FOR THE EQUITY ALLOCATION
    • ASSETS OTHER THAN EQUITIES
    • IMPLICATIONS FOR LIABILITIES
    • GROWTH SURPRISES AND PENSION FUNDING POLICY
    • DC PLANS
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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