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One-thirty on a Friday morning. The barroom, Harvard Club of New York. Empty wine bottles haphazardly arranged amid plates of free peanuts and potato chips. Loud talking, little understanding, much joviality.
The tail end of a night gone wrong (or very right)? No. The last vestige of a day at the CIO Summit of New York, 2013 Edition.
Well, for some of us. For others (Editor’s note: me), bedtime was hours before. But for a brave few, it was an evening well-earned, spent discussing the merits of risk-factor investing, liability management, and the plethora of other topics permeating institutional investing. And while some of us weren’t there to hear what they had to say, here is our best approximation…
“Two themes ran throughout the conference: governance and risk-factor investing. Like a child on a busy street, every time the discussion meandered, it was pulled back to these two topics.
“For the issue of governance, this was planned. The theme of the conference was ‘Empowering the CIO’—which is a not-so-subtle way of saying that many CIOs work within a structure that pulls power away from experts and towards a board composed of generalists. Thus, figuring out how to work within this structure—how to educate boards on new investment topics, get these boards to agree with CIOs and their teams, and let these teams control more of the investment process—is essential for a CIO. Every panel, fireside chat, and presentation was brought back to the idea that CIOs do not work in a vacuum, and thus the realities of their situation must be recognized.
“For risk-factor investing, this was not planned. It should have been. It is clearer now than ever before that asset owners are changing the way they define their portfolio holdings. Asset classes aren’t dead—as was made clear by many panelists—but they aren’t the same as they once were. Instead, asset owners are increasingly considering the underlying risks in their portfolios-be they inflation, credit, growth, or any number of potential risk factors that influence the value of their holdings. The cause of this is somewhat obvious. Traditional portfolios were battered in 2008. Many CIOs were humbled by the experience, and have turned to new products and strategies.
“On the product front, risk parity has been the winner. Predicting future asset-class returns is nearly impossible, many think, but predicting future risk—because risk seems to be more mean reverting—might be easier. This is not an uncontroversial idea. For many, risk parity has become personal, perhaps because while interest rates will eventually rise-possibly hurting risk parity strategies-the market can hold them low for frustratingly long periods of time.
“On the strategy side, risk-factor investing has come to the fore—of thinking, if not action. Some funds have redefined their portfolios along risk lines, but most are in the discussion phase. On one hand, almost all CIOs know that they need to rethink how their portfolio will react in stressful environments, and looking to the underlying risk exposures that drive returns is the obvious course of action. On the other, there is hardly any agreement on what these risk exposures are. Some thinkers have the number at six, some have them at 13, others have them at multiples of both. So there is much more thinking to do on this subject…now pass the wine.”
Or that’s what we hope they were saying. Only a handful of people, those last holdouts against sleep, know for sure. And they aren’t talking-probably because their heads hurt the next morning. —KPM