As investors rethink, strategists propose ‘macro-resilient’ approach

As a synchronized rout in stocks and bonds this year sours the outlook for 60-40 portfolios, some strategists see an opportunity for a new-and-improved investing framework.

MSCI, in conjunction with GIC – a sovereign wealth fund of the Government of Singapore – this week proposed an alternative to the mainstay equities and fixed income mix that has long been a favorite of long-term investors: an asset allocation that integrates macroeconomic risk considerations.

With inflation running near a 40-year high and the Federal Reserve on its most aggressive interest-rate hiking path in decades, the famed 60-40 portfolio composition of stocks and bonds is on pace for its worst returns this year in a century, data show.

As investors consider new options, MSCI and GIC released a report that proposes a “macro-resilient frontier” portfolio. It would aim to better consider headwinds from possible macroeconomic shocks — like those that have permeated over the past year — while integrating private assets and placing them “on the same footing” as public ones to help manage long-term risks and returns.

First and foremost, according to the firms’ proposal, the strategy would entail a shift away from “short-term, backward-looking measures of risk” to tools that can assess the growing macroeconomic uncertainties changing the current investment landscape.

“Some of these macro risks — including supply-driven inflation, a less-credible central bank, rising real rates and slowing productivity growth — were modest risks in recent decades but could significantly change the trajectory of the markets in the years ahead,” wrote report authors Peter Shepard of MSCI and GIC’s Grace Qiu Tiantian and Ding Li.

That view has also been expressed by BlackRock strategists earlier this year, as they argued secular macroeconomic shifts have set forth a “new regime” for investors.

The team at MSCI and GIC suggested the spectrum of exposure to macro risks in private assets could help manage long-term risk across portfolios more broadly — but specifically when used appropriately in tandem with other asset classes.

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“Private assets may play an important role in diversifying long-term risk, but doing so requires putting private assets on the same footing as the rest of the portfolio and understanding the range of macro exposures they add to the portfolio,” the report said.

To do so, the firms propose modeling the sensitivity of individual asset classes to the five scenarios in the above chart, which may shape the macro regime in coming decades: shocks to demand, supply, trend growth, central bank policy, and long-term real rates. That also means no longer categorizing assets into oversimplified buckets, like equities for growth or real assets to inflation protection.

For example, once taking individual macro risks into consideration rather than generalizing them, the asset mix of the “macro-resilient portfolio” shifts away from traditional bonds and instead into bond-like infrastructure and TIPS, or Treasury Inflation-Protected Securities.

Ultimately, the macro-resilient portfolio would aim to reduce exposure to nominal bonds and boost exposures to real assets and equity risk premium, an excess return that rewards investors for taking on the relatively higher risk of equity investing.

“The underlying macroeconomic drivers provide a common lens to view all assets consistently and intuitively, allowing comparisons and trade-offs across public and private markets,” MSCI and GIC said in the report. “The multi-horizon nature of the framework also enables decision-making over different time horizons, potentially facilitating strategic and tactical positioning.”

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Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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