Investors have had more than their fair share of volatility recently, but will it continue? During his talk at the 2014 Risk Management Conference in Muskoka, Ontario, Ravi Venkataraman, senior managing director, global head of consultant relations & defined contribution, with MFS Investment Management, identified three long-term headwinds that suggest there may be more volatility to come.
1. Debt—”Volatility is generally tied to growth,” said Venkataraman, noting that “debt levels across the developed world are at extremely high levels.” He believes that how the world manages these levels will be a significant challenge going forward.
2. Aging world—In both developed and developing countries, the ratio of elderly to working-age populations is increasing, causing stress worldwide. However, he added, people are working longer, which might mitigate some of that stress.
3. Liquidity—Due to increased capital requirements and sources of liquidity being taken out of the system, liquidity has declined in the last five years, Venkataraman noted.
So what’s a plan sponsor to do? Volatility management techniques can be either policy-based (i.e., at the governance/total portfolio level) or strategy-based (at the investment level), said Venkataraman.
At the policy level, managing volatility can be strategic (e.g., strategic asset allocation or risk parity) or dynamic (e.g., opportunistic allocation or dynamic de-risking), while at the strategy level, there are options such as smart beta and liability-driven investing (LDI).
When deciding which levers to use, Venkataraman offered four key takeaways.
- Don’t be swayed by short-term proposals—”We’ve found, in our conversations with clients, that it’s useful to put in place a framework to manage these discussions around risk,” he explained.
- Distinguish between policy-based and strategy-level levers.
- Consider the economic environment, as this will affect costs.
- Have at least an annual discussion about risk management.
Alyssa Hodder is editor, Benefits Canada.