A lot has happened over the last three years — the COVID-19 pandemic, the United Kingdom withdrawing from the European Union, China and India engaged in border skirmishes, Biden’s inauguration as the President of the US, Kabul falling following the offensive Taliban attack, to the current Russian-Ukraine conflict, supply-side bottlenecks and multi decade-high inflation across various countries, to name a few.
Various investors, family offices and HNIs are changing the investment framework and strategies at the portfolio level targeted toward creating an all-weather portfolio. The objective of an all-weather portfolio is to navigate and withstand the vagaries of economic, business and asset cycles. As a result, they are moving away from a single investment style and/or a buy and hold framework to a multi-investment style and/or core and satellite framework.
In addition to the benefits of diversification across various investment styles, it helps to keep the portfolio risk and volatility within the targeted level and exploit opportunities across economic and business cycles.
Prashant Joshi, Co-founder and Partner, Fintrust Advisors, says, “The huge advantage is that it removes the classic source of performance leakage from an inadvertent single investment style and buy and hold approach, which can be short, mid or long term.”
What is an investment strategy?
An investment style/strategy often describes the overarching approach taken by the fund manager when assembling a portfolio of assets. Investment strategy, Joshi explains, “provides some insight into which risks and returns investors are likely to be exposed to and what the drivers of those returns are likely to be.”
The four most known investment styles are Value, Growth, Quality and Momentum. Investment styles can be divided and further sub-divided into a host of different, and often highly esoteric, ways like quality, momentum, cyclical, dividend growth, deep value, event-driven, special situations, to name a few.
How does it help investors?
Investment strategies help investors choose where and how to invest as per their expected return, risk appetite, time horizon and preferred investment styles. It is governed by a set of rules and procedures created to guide investors in designing their investment portfolios.
For instance, a barbell investment strategy means having a Value Style and a Growth style at the two ends. Having three equal buckets of Value, Growth and Momentum is a bucketing strategy, and having Value style at Core and Momentum style as the Satellite is Core and Satellite strategy.
Barbell investing involves investing in the two extremes. For example, high-risk and no-risk assets while staying away from those in the mushy middle to balance risk and reward. However, experts say, the emergence of various investment styles made it a challenging environment to have a barbell strategy.
Joshi of Fintrust Advisors points out, “Investors transitioned to bucketing style strategies where investments are held in three or more investment styles an investor understands and relates to. Many family offices and ultra HNI’s have moved to the so-called core/satellite strategy where Core forms the bulk of the portfolio and Satellite complements it, which is tactical allocation whereby one takes a relatively higher risk and explores opportunities in order to earn higher portfolio returns.”
Things to keep in mind
There is no one-size-fits-all approach. Within each strategy, the investment styles and their weights can change. “There are various blends of strategy and style that one can construct to make an investment framework,” says Joshi.
Having said that, it is a must to have a thorough understanding of the risk and reward, supported by backtesting, scenario analysis, and other empirical evidence.
Anup Bansal, Chief Investment Officer, Scripbox, says, “An investor should identify the goal and risk tolerance level before embarking upon investing. They should also evaluate the riskiness of a fund’s portfolio before investing and ensure their risk profile is in line with the overall investment strategy. “
Industry experts say, gone are those days when investors built portfolios on an ad-hoc basis without any real grasp of the investment strategy. Instead, Joshi adds, “people have understood that having the right investment style and strategy blend significantly improves their chances of success and is required for an All-Weather portfolio. And rightly so, as ‘how’ one invests is as important as ‘what’ one invests in.”
