Confidence Starts with Portfolio Resilience

Keeping your portfolio balanced and resilient

The coronavirus outbreak and its impact on global markets demonstrated again how important it is to have a well-diversified portfolio that can weather storms and stay aligned with your goals.

But portfolio resilience doesn’t just happen. It’s built intentionally. We believe confidence can be enhanced by thoughtful, strategic rebalancing – adding resilience to the construction and management of investment portfolios.

For our latest insights on how the coronavirus is impacting global economies and our outlook on financial markets please visit the AdvantageVoice Blog.

Is your portfolio balanced for change? article.

Is your portfolio balanced for change?

Investing is the pursuit of balance—between risk and return, between short- and long-term goals, and between the asset classes in a portfolio. Market volatility can make it increasingly challenging for investors to keep their portfolios aligned with their objectives. Read more about our thoughts on giving rebalancing the attention and intention today’s markets demand.

Read the Report (PDF)

Is your portfolio balanced for change?

Investing is the pursuit of balance—between risk and return, between short- and long-term goals, and between the asset classes in a portfolio. Market volatility can make it increasingly challenging for investors to keep their portfolios aligned with their objectives. Read more about our thoughts on giving rebalancing the attention and intention today’s markets demand.

Read the Report (PDF)

A portfolio manager perspective

Head of Multi-Asset Solutions, Dan Morris, discusses the importance of reassessing opportunities and the three approaches to rebalancing.

What’s meant by “balance” in a portfolio context?

The first half of 2020 battered global markets; up-ending consumption, changing the perceived level of stability and creating liquidity challenges for almost all investors. In a post Covid-19 world, then, there is new opportunities and we have to reassess not just what this impact means for investing but also for society. As global trends change, where we work changes and that creates new opportunities for investors and the portfolios that they manage.

So, what has changed and what stayed the same? Staying the same - investors still have goals, they still want to generate income, they still want to invest their wealth to make payments over the long term without running out of capital by preserving that wealth and they still want to grow their wealth so they have a pot to retire with.

Ultimately investors may have a policy benchmark they are trying to stay balanced to; so, what does that policy benchmark look like and how do you build a balanced one? We start by thinking about risk within a portfolio rather than allocating capital. That comes down to the big macro drivers; equity, interest rates and inflation sensitivities. We then think about factors and how factors can drive our return to meet those long-term goals.

So, beyond the policy benchmark, when we are creating it, we might be aggregating exposures from underlining managers, we really need to understand how those exposures have changed, so that when aggregated we still have a balanced portfolio.

What's changed? Well, the massive turnover that we’ve seen in portfolios and the change in the characteristics of the names within them, means portfolios need to be completely revisited. And we need to ask ourselves some questions, and be devils’ advocate: ‘What’s worked as we expected? What didn’t work as we expected and what would we think is going to not work in the future?’, so we can adjust the portfolios to perform to meet those long-term goals.

How do investors determine what’s the right balance?

If we define risk as the failure to achieve an objective, then we have a starting place to which we can rebalance to. So, has the goal stayed the same? Has the tolerance to risk stayed the same? And where do we need to change the portfolio to keep us on track? Are we going to allocate by risk or by capital; asset class or security; or factor or risk premium?

With this starting point we can find balance in a portfolio and begin to make a plan to take opportunistic trades or also think about risk hedges in the portfolio. Working with one client who had a pre-planned hedge in place, actually it became very uncomfortable to go through this phase. As the hedge mounted, the amount of cash in the portfolio increased. And so, when they looked at their equity portfolio, it was mostly cash and it was uncomfortable.

They stuck with it and as the hedge came off and went back to equity, the performance has done exactly as they expected.

As portfolios become increasingly more diverse and complex, liquidity can be a prized asset. So I recall working with an investor who had a large allocation to private assets, as their liquid assets fell in value, they were struggling to rebalance their portfolio. They had contractual payments that they had to make and so they’re actually looking to end up selling their best performing allocations that they actually wanted to hold on to, all because they were short on liquidity.

How do investors get back to balance, whatever that new balance might be?

Investors have three choices: buy and hold, systematic rebalancing or discretionary balancing.

The first choice is to buy and hold, but that doesn’t mean doing nothing. It means monitor the positions and make sure there isn’t new information that should change what is being held. Think if you are an investor that has got certain cashflows in the future, and you have a fixed income portfolio that’s been matched to those future payments. If there’s nothing changed about the assets or the payment that you are looking to make, then a buy and hold strategy can be appropriate.

Systematic re-balancing takes the emotion out of investing. It puts the emotion into the research and the analysis and planning that comes before. Systematic rebalancing is defined by rules that we don’t second guess as the market moves.

Discretionary rebalancing is rebalancing a portfolio based on judgements about the future. It’s at the heart of opportunistic strategies. These can be considered discretionary strategies that benefit from information that cannot easily be codified into rules-based approaches.

These decisions may be most valuable when markets are in uncharted waters like we find ourselves now. In the post Covid-19, we are rerating our base case for companies, analysts and, investors and the market at large, as we are incorporating the implications of a changing world on how investments might perform – as well as what they ultimately mean for wider society. This could mean many opportunities for rebalancing.

I recall working with a client in 2008 and we spent a lot of time putting a systematic re-balancing strategy in place. Now, during 2008, for the first time these triggers were being hit and we had to rebalance the portfolio. There were lots of emails and phone calls flying in both directions as for the first time they were trading. We still meet 12 years on and recall those emails and actually the beneficial position it put them in.

Disclosures

All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics.

This material is for general informational and educational purposes only and is NOT intended to provide investment advice or a recommendation of any kind—including a recommendation for any specific investment, strategy, or plan.

The views expressed and any forward-looking statements are as of June 19, 2020, are those of Dan Morris, Head of Systematic Investments; and/or Wells Fargo Asset Management. Discussions of individual securities, or the markets generally, or any Wells Fargo Fund are not intended as individual recommendations. Future events or results may vary significantly from those expressed in any forward-looking statements; the views expressed are subject to change at any time in response to changing circumstances in the market. Wells Fargo Asset Management disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.

Wells Fargo Asset Management (WFAM) is the trade name for certain investment advisory/management firms owned by Wells Fargo & Company. These firms include but are not limited to Wells Capital Management Incorporated and Wells Fargo Funds Management, LLC. Certain products managed by WFAM entities are distributed by Wells Fargo Funds Distributor, LLC (a broker-dealer and Member FINRA).

PAR-0620-01241

What’s meant by “balance” in a portfolio context?

The first half of 2020 battered global markets; up-ending consumption, changing the perceived level of stability and creating liquidity challenges for almost all investors. In a post Covid-19 world, then, there is new opportunities and we have to reassess not just what this impact means for investing but also for society. As global trends change, where we work changes and that creates new opportunities for investors and the portfolios that they manage.

So, what has changed and what stayed the same? Staying the same - investors still have goals, they still want to generate income, they still want to invest their wealth to make payments over the long term without running out of capital by preserving that wealth and they still want to grow their wealth so they have a pot to retire with.

Ultimately investors may have a policy benchmark they are trying to stay balanced to; so, what does that policy benchmark look like and how do you build a balanced one? We start by thinking about risk within a portfolio rather than allocating capital. That comes down to the big macro drivers; equity, interest rates and inflation sensitivities. We then think about factors and how factors can drive our return to meet those long-term goals.

So, beyond the policy benchmark, when we are creating it, we might be aggregating exposures from underlining managers, we really need to understand how those exposures have changed, so that when aggregated we still have a balanced portfolio.

What's changed? Well, the massive turnover that we’ve seen in portfolios and the change in the characteristics of the names within them, means portfolios need to be completely revisited. And we need to ask ourselves some questions, and be devils’ advocate: ‘What’s worked as we expected? What didn’t work as we expected and what would we think is going to not work in the future?’, so we can adjust the portfolios to perform to meet those long-term goals.

How do investors determine what’s the right balance?

If we define risk as the failure to achieve an objective, then we have a starting place to which we can rebalance to. So, has the goal stayed the same? Has the tolerance to risk stayed the same? And where do we need to change the portfolio to keep us on track? Are we going to allocate by risk or by capital; asset class or security; or factor or risk premium?

With this starting point we can find balance in a portfolio and begin to make a plan to take opportunistic trades or also think about risk hedges in the portfolio. Working with one client who had a pre-planned hedge in place, actually it became very uncomfortable to go through this phase. As the hedge mounted, the amount of cash in the portfolio increased. And so, when they looked at their equity portfolio, it was mostly cash and it was uncomfortable.

They stuck with it and as the hedge came off and went back to equity, the performance has done exactly as they expected.

As portfolios become increasingly more diverse and complex, liquidity can be a prized asset. So I recall working with an investor who had a large allocation to private assets, as their liquid assets fell in value, they were struggling to rebalance their portfolio. They had contractual payments that they had to make and so they’re actually looking to end up selling their best performing allocations that they actually wanted to hold on to, all because they were short on liquidity.

How do investors get back to balance, whatever that new balance might be?

Investors have three choices: buy and hold, systematic rebalancing or discretionary balancing.

The first choice is to buy and hold, but that doesn’t mean doing nothing. It means monitor the positions and make sure there isn’t new information that should change what is being held. Think if you are an investor that has got certain cashflows in the future, and you have a fixed income portfolio that’s been matched to those future payments. If there’s nothing changed about the assets or the payment that you are looking to make, then a buy and hold strategy can be appropriate.

Systematic re-balancing takes the emotion out of investing. It puts the emotion into the research and the analysis and planning that comes before. Systematic rebalancing is defined by rules that we don’t second guess as the market moves.

Discretionary rebalancing is rebalancing a portfolio based on judgements about the future. It’s at the heart of opportunistic strategies. These can be considered discretionary strategies that benefit from information that cannot easily be codified into rules-based approaches.

These decisions may be most valuable when markets are in uncharted waters like we find ourselves now. In the post Covid-19, we are rerating our base case for companies, analysts and, investors and the market at large, as we are incorporating the implications of a changing world on how investments might perform – as well as what they ultimately mean for wider society. This could mean many opportunities for rebalancing.

I recall working with a client in 2008 and we spent a lot of time putting a systematic re-balancing strategy in place. Now, during 2008, for the first time these triggers were being hit and we had to rebalance the portfolio. There were lots of emails and phone calls flying in both directions as for the first time they were trading. We still meet 12 years on and recall those emails and actually the beneficial position it put them in.

Disclosures

All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics.

This material is for general informational and educational purposes only and is NOT intended to provide investment advice or a recommendation of any kind—including a recommendation for any specific investment, strategy, or plan.

The views expressed and any forward-looking statements are as of June 19, 2020, are those of Dan Morris, Head of Systematic Investments; and/or Wells Fargo Asset Management. Discussions of individual securities, or the markets generally, or any Wells Fargo Fund are not intended as individual recommendations. Future events or results may vary significantly from those expressed in any forward-looking statements; the views expressed are subject to change at any time in response to changing circumstances in the market. Wells Fargo Asset Management disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.

Wells Fargo Asset Management (WFAM) is the trade name for certain investment advisory/management firms owned by Wells Fargo & Company. These firms include but are not limited to Wells Capital Management Incorporated and Wells Fargo Funds Management, LLC. Certain products managed by WFAM entities are distributed by Wells Fargo Funds Distributor, LLC (a broker-dealer and Member FINRA).

PAR-0620-01241

What’s meant by “balance” in a portfolio context?

The first half of 2020 battered global markets; up-ending consumption, changing the perceived level of stability and creating liquidity challenges for almost all investors. In a post Covid-19 world, then, there is new opportunities and we have to reassess not just what this impact means for investing but also for society. As global trends change, where we work changes and that creates new opportunities for investors and the portfolios that they manage.

So, what has changed and what stayed the same? Staying the same - investors still have goals, they still want to generate income, they still want to invest their wealth to make payments over the long term without running out of capital by preserving that wealth and they still want to grow their wealth so they have a pot to retire with.

Ultimately investors may have a policy benchmark they are trying to stay balanced to; so, what does that policy benchmark look like and how do you build a balanced one? We start by thinking about risk within a portfolio rather than allocating capital. That comes down to the big macro drivers; equity, interest rates and inflation sensitivities. We then think about factors and how factors can drive our return to meet those long-term goals.

So, beyond the policy benchmark, when we are creating it, we might be aggregating exposures from underlining managers, we really need to understand how those exposures have changed, so that when aggregated we still have a balanced portfolio.

What's changed? Well, the massive turnover that we’ve seen in portfolios and the change in the characteristics of the names within them, means portfolios need to be completely revisited. And we need to ask ourselves some questions, and be devils’ advocate: ‘What’s worked as we expected? What didn’t work as we expected and what would we think is going to not work in the future?’, so we can adjust the portfolios to perform to meet those long-term goals.

How do investors determine what’s the right balance?

If we define risk as the failure to achieve an objective, then we have a starting place to which we can rebalance to. So, has the goal stayed the same? Has the tolerance to risk stayed the same? And where do we need to change the portfolio to keep us on track? Are we going to allocate by risk or by capital; asset class or security; or factor or risk premium?

With this starting point we can find balance in a portfolio and begin to make a plan to take opportunistic trades or also think about risk hedges in the portfolio. Working with one client who had a pre-planned hedge in place, actually it became very uncomfortable to go through this phase. As the hedge mounted, the amount of cash in the portfolio increased. And so, when they looked at their equity portfolio, it was mostly cash and it was uncomfortable.

They stuck with it and as the hedge came off and went back to equity, the performance has done exactly as they expected.

As portfolios become increasingly more diverse and complex, liquidity can be a prized asset. So I recall working with an investor who had a large allocation to private assets, as their liquid assets fell in value, they were struggling to rebalance their portfolio. They had contractual payments that they had to make and so they’re actually looking to end up selling their best performing allocations that they actually wanted to hold on to, all because they were short on liquidity.

How do investors get back to balance, whatever that new balance might be?

Investors have three choices: buy and hold, systematic rebalancing or discretionary balancing.

The first choice is to buy and hold, but that doesn’t mean doing nothing. It means monitor the positions and make sure there isn’t new information that should change what is being held. Think if you are an investor that has got certain cashflows in the future, and you have a fixed income portfolio that’s been matched to those future payments. If there’s nothing changed about the assets or the payment that you are looking to make, then a buy and hold strategy can be appropriate.

Systematic re-balancing takes the emotion out of investing. It puts the emotion into the research and the analysis and planning that comes before. Systematic rebalancing is defined by rules that we don’t second guess as the market moves.

Discretionary rebalancing is rebalancing a portfolio based on judgements about the future. It’s at the heart of opportunistic strategies. These can be considered discretionary strategies that benefit from information that cannot easily be codified into rules-based approaches.

These decisions may be most valuable when markets are in uncharted waters like we find ourselves now. In the post Covid-19, we are rerating our base case for companies, analysts and, investors and the market at large, as we are incorporating the implications of a changing world on how investments might perform – as well as what they ultimately mean for wider society. This could mean many opportunities for rebalancing.

I recall working with a client in 2008 and we spent a lot of time putting a systematic re-balancing strategy in place. Now, during 2008, for the first time these triggers were being hit and we had to rebalance the portfolio. There were lots of emails and phone calls flying in both directions as for the first time they were trading. We still meet 12 years on and recall those emails and actually the beneficial position it put them in.

Disclosures

All investing involves risks, including the possible loss of principal. There can be no assurance that any investment strategy will be successful. Investments fluctuate with changes in market and economic conditions and in different environments due to numerous factors, some of which may be unpredictable. Each asset class has its own risk and return characteristics.

This material is for general informational and educational purposes only and is NOT intended to provide investment advice or a recommendation of any kind—including a recommendation for any specific investment, strategy, or plan.

The views expressed and any forward-looking statements are as of June 19, 2020, are those of Dan Morris, Head of Systematic Investments; and/or Wells Fargo Asset Management. Discussions of individual securities, or the markets generally, or any Wells Fargo Fund are not intended as individual recommendations. Future events or results may vary significantly from those expressed in any forward-looking statements; the views expressed are subject to change at any time in response to changing circumstances in the market. Wells Fargo Asset Management disclaims any obligation to publicly update or revise any views expressed or forward-looking statements.

Wells Fargo Asset Management (WFAM) is the trade name for certain investment advisory/management firms owned by Wells Fargo & Company. These firms include but are not limited to Wells Capital Management Incorporated and Wells Fargo Funds Management, LLC. Certain products managed by WFAM entities are distributed by Wells Fargo Funds Distributor, LLC (a broker-dealer and Member FINRA).

PAR-0620-01241

3 approaches to help stay aligned with portfolio goals article
3 approaches to help stay aligned with portfolio goals article
Short- and long-term portfolio article.
Short- and long-term portfolio article.

3 approaches to help stay aligned with portfolio goals

Discover the tradeoffs among perceived opportunities, costs, and risks.

Read More (PDF)

Ward off your liquidity challenges

Discover how a single portfolio in any market cycle can support suitable planning and design to balance short-term commitments with long-term investing.

Read More (PDF)
In a sea of stimulus article.
In a sea of stimulus article.
Sustainable investing article.
Sustainable investing article.

3 approaches to help stay aligned with portfolio goals

Discover the tradeoffs among perceived opportunities, costs, and risks.

Read More (PDF)

Swimming or sinking in debt

Explore the impact of government and central bank stimulus measures, the potential implications of rising debt, and how they may impact the future.

Read More (PDF)

Embracing sustainable investing

The more investors learn about sustainable investing, the more it influences investment decisions in their portfolio.

Read More (PDF)

Ward off your liquidity challenges

Discover how a single portfolio in any market cycle can support suitable planning and design to balance short-term commitments with long-term investing.

Read More (PDF)

Swimming or sinking in debt

Explore the impact of government and central bank stimulus measures, the potential implications of rising debt, and how they may impact the future.

Read More (PDF)

Swimming or sinking in debt

Explore the impact of government and central bank stimulus measures, the potential implications of rising debt, and how they may impact the future.

Read More (PDF)

Embracing sustainable investing

The more investors learn about sustainable investing, the more it influences investment decisions in their portfolio.

Read More (PDF)

Embracing sustainable investing

The more investors learn about sustainable investing, the more it influences investment decisions in their portfolio.

Read More (PDF)

In times of crisis, preparation enables strength

Listen to how experience and discipline helped our portfolio managers manage through uncertainty.

Ann Miletti: You may wonder how an investment team prepares for and then reacts during a time of crisis. Well, I can tell you. There is no playbook for something like that. But what I’ve witnessed over the last several months has looked like a well-rehearsed play from the outside looking in.

Dan Morris: How do you prepare to react if you’re thrown off balance? Well, you need a game plan in advance to be ahead of the curve, even if it’s painful. For multi-asset portfolios, maintaining balance was key to a very good first half of the year. Diversification is the first line of defense, but active risk project can also help us react to short-term market events.

Janet Rilling: Of course as with many things in life, our ability to take advantage of an opportunity was only made possible due to the preparations we had made earlier. In 2019 and early 2020, we reduced risk in the portfolio, shifting into higher quality, more liquid securities. That gave us dry powder to fund a range of purchases in March and April.

Ann: And it's not because our investment teams were given a heads up that a global crisis was about to emerge. But when one did, what also showed up was skill, experience, and discipline.

Tom Ognar: We weren’t wasting time thinking about “Oh, we’ve got too much beta, too little beta, or we own too much cash, or too little cash.” What we were doing during that period of time was truly optimizing the portfolio for our clients and making sure we owned hopefully those companies that would lead us into that next generation of growth.

Derrick Irwin: So we didn’t predict that a pandemic would hit or any of the economic damage it would leave in its wake. But we were in the very fortunate position not to have to react because we had a solid portfolio. Instead, we were able to think of this volatility as an opportunity and I think that’s how you prepare to react. You consistently follow your strategy and you consistently think about “How do I continue to improve my portfolio?”

Ann: Experience that came from having portfolio managers that have managed other crises before and discipline that comes from having strong investment processes that are embedded within our investment teams that they use every single day to manage their clients’ money.

Dan: And in fact, when we look at previous pandemics, they tend to come in waves. Therefore, there may be more challenge ahead. We have to play Devil’s Advocate against ourselves where we actively revisit our strategy design, our exposures, and our trades to make sure that we’re getting the exposures that we want to achieve the outcomes that we want to for our clients.

Janet: Balance has always been an important concept in our investment process. That is why we’ve designed our portfolios to adhere to high level targets. We do this by defining allocation ranges for each sector of the portfolio. Our ranges are set wide enough to allow ample room to take advantage of market opportunities like we saw in March, but also narrow enough to keep the portfolio within our desired risk profile and not allow one position to dominate performance. As a result, we stay disciplined in our exposures and have a diversified set of investments in the portfolio.

Ann: So when a healthcare crisis hit and it wreaked havoc across the global economies and caused some of the most volatile market conditions we’ve seen in our history, they ignored the noise and the emotion and they relied on their investment process and their teams.

Tom: So we go out there and we find those great growth companies that are leading and bringing the economy into the next generation, but we do that with thoughts constantly around valuation, what we’re paying in that risk versus reward to own that growth.

Derrick: The MSCI emerging market benchmark covers 26 different countries with different economies, different demographics, different economic drivers, different politics, so naturally the risk in one part of emerging markets is always going to be different and imbalanced from the risk in other parts of emerging markets. And we manage that by having a group of very experienced analysts with deep in-country and in-region experience so that they get a really good sense of where the companies that we look at fit within their economies and the risk of their economies. And then where they fit within their regions and ultimately where do they fit within the overall global economy.

Ann: I wasn't watching a play. I was watching experience and preparation. Our teams were prepared to deal with uncertainty.

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