James Walton

James Walton is a managing director in Agilis’s Boston office. James advises a range of institutional investors and leads Agilis’s derivatives business. He also leads Agilis’s independent expert services, which performs due diligence on the insurers active in the U.S. pension risk transfer market. Prior to 2016, James was at Legal and General and was responsible for the investment strategy of the company’s U.S. insurance business. James started his career at Aon in London as a consultant focusing on asset allocation and analytics. James is a qualified actuary and holds a master’s degree in physics (summa cum laude) from the University of Oxford.

CIO: What changes are you making to your asset allocation advice, given the current state of monetary policy, geopolitics and the impact of inflation and rising interest rates?

Walton: Rising interest rates have transformed the relative attractiveness of equities, fixed income and cash-like instruments on a forward-looking basis. Many institutional investors with interest rate duration as a component of their return objective, such as a corporate pension plans, have reduced or eliminated short exposure to long-term interest rates coming out of 2022. While I don’t support knee-jerk asset allocation changes, such a significant change in the interest rate environment has justified a significant re-think to the strategic asset allocation. Over the past year that has usually resulted in higher allocations to fixed income. Also, while no CIO or consultant will get congratulated for the idea to hold cash, a liquid, low-fee, low-volatility annual return of 5% should not be overlooked this year.

CIO: What actionable thing have you learned over the course of your career that has proven itself this year?

Walton: Consider thinking in dollars, not always percentages.

Throughout my career, I have used derivatives, and often leverage, to achieve risk and return objectives for my institutional investor clients. This has allowed these clients to separate the decisions about how much risk to take on by asset class. In many cases, this has changed the focus to be on setting dollar risk budgets and allocation targets, rather than referencing a percentage of assets. One of the benefits to using derivatives is that you are no longer constrained to percentages that add to 100%.

This approach has been very helpful to returns over the past couple of years. Coming out of 2022, investors with fixed allocation targets, particularly pension plans, may have found themselves rebalancing to percentage targets that moved them out of equities and into long-duration bonds, because interest rate rises had diminished the value of bonds. Rebalancing to percentage targets automatically at a time when equities were recently depressed has deprived such investors of returns they could have achieved had they remained invested in equities as equities have rallied. Clients with whom I have supported a dollar-based level of equity risk aligned to wider objectives, rather than a share of assets, were able to remain fully invested throughout the recent 18 months of market recovery. While things could have gone the other way, the point is to set the objectives thoughtfully—not just using cookie cutter percentage targets that make the consultant or asset manager’s life easier.

CIO: What asset classes (specific securities or sectors) look good to you now? Why?

Walton: Looking at equities, I like ‘quality’ companies currently. The MSCI World Quality Index has outperformed the All Country World Index by an aggregate 20% over the last few years, and I believe that gap is more likely to widen than shrink. If we see slowing economic conditions, possibly with lower interest rates, I expect quality to outperform, particularly as quality firms exhibit more stable, future ‘bond-like’ profits. Conversely, an overheating economy with sticky inflation also could be relatively favorable to quality. There are other scenarios in which quality may underperform but, given the various possible outcomes, such a quality tilt looks attractive from this point forward.