The University of California San Diego’s Kroner Center for Financial Research is examining four research areas that can assist institutional investors in determining successful strategies that mitigate risk and generate alpha, said its executive director Michael Melvin, during the Canadian Investment Review‘s 2023 Investment Innovation Conference in November.
The think tank’s advisory council, which is comprised of chief investment officers, is researching how to measure and model geopolitical risk, selecting the right benchmarks, consequences of over-diversification and managing private equity portfolios amid interest rate volatility.
While the research surrounding geopolitical risk began before hostilities broke out in the Middle East, it’s important that pension funds embrace active management within their international investments. “This research will analyze how [institutional investors] should adjust [their] portfolios as geopolitical risk evolves.”
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Benchmarking is always top of mind for investors, said Melvin, noting the centre’s research will examine how to choose the right benchmarks and how to better align benchmarks with individual pension plans. The exploration of the potential unintended consequences of over-diversification was inspired by an anecdote from one of the advisory council members, who bought into a very small portion of an asset from India that grew to be a thorn in his side. Although it was an immaterial fraction of his portfolio, he ended up spending an inordinate amount of time dealing with the problem.
While diversification is very important in maintaining a healthy portfolio, Melvin noted it’s important for institutional investors to keep abreast of each market and the Kroner Center’s research aims to help them do this efficiently and successfully.
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The current interest rate volatility is proving problematic for private equity markets. With interest rates significantly higher, more and more firms are pitching various products, he said, noting the centre is seeking to help investors analyze prospective companies and consider potential downsides and risks.
The Kroner Center’s research also showcases the differences between small to mid-sized plans and their larger counterparts — differences that carry implications for what can, on the surface, appear to be reasonable approaches to portfolio management, said Melvin. “The way the centre’s research is conducted, it has lessons for everyone, whether it applies to a particular regulatory jurisdiction or not.”
Read more coverage of the 2023 Investment Innovation Conference.