Why it's time for portfolio construction 2.0

Money manager says the world is a different place and alternative investment strategies are required

Why it's time for portfolio construction 2.0

The only thing constant is change – and that’s why we are entering the era of portfolio construction 2.0.

Jonathan Pinsler, senior vice president, portfolio manager and investment advisor at Private Wealth Management, TD Wealth, said that after the low rates of the post 2008-09 period, we are in unorthodox times and that using traditional asset mix diversification alone is outdated.

In a rising-rate environment, he believes the fixed-income space is at a crossroads with little or no money to be made over the next three to five years, while stock market correlations are high and volatility is on the rise.

In these “fast times” with “changing narratives” across the globe, he added that real estate, potential trade wars and inflation spice things up further.

Pinsler urged investors to combine traditional asset categories with alternative investment strategies, which include anything from gold, long/short in fixed income or equities, arbitrage and isolated credit strategies to asset-based lending.

He said that a modern portfolio really has to zone in on risk factors in order to get a positive outcome.

He said: “It used to be that in a traditional portfolio if one had geography within stocks, you could say you were diversified but in today’s environment the correlations between different equity markets are quite high.

“It’s the same thing with bonds. Bonds used to go up and down whether you were in a government bond or a high-quality corporate bond; today you have to have different risk factors to provide some offset.

“What I mean by that within the fixed income world is, does it make sense to have fixed-income bonds, investment grade bonds where we’re not huge fans of investment government bonds? They are different strategies where you can still make money; something called isolated credit strategies, for example.”

He added that alternative strategies provide diversification because of their different risk profiles and recommends investors allocate about 15% of their portfolio to it. Pinsler said he is currently taking fixed-income money and adding this to the alternative section because of the increased possibility of good performance in both a negative stock market and bond market.

Large institutions like TD Bank have adopted these modern methods, which Pinsler called a “pivot shift”, but most high-net-worth individuals have yet to change because returns have been so good for so long.

He said: “One has not needed to incorporate portfolio construction 2.0 in the rear view mirror because returns have been splendid, certainly in the equity space. The worst investment decision would have been to be in cash in the past five years because risk has been amply rewarded.

“Even fixed income, if you exclude the last year, has been a decent category to invest in; one has not really had to look deeper than the traditional categories but we’re in a different world today.

“There are a lot of different things going on that are very unorthodox and I think that now’s the time that one needs to look at things differently.”