Geopolitical Strife Sends Money Managers Scurrying for Safety

There’s an old Chinese saying: “May you live in interesting times.”

Some historians say it’s a proverb and others, including former President John F. Kennedy, called it a curse. These days, money managers may be channeling JFK, as volatility is once again rolling down Wall Street.

Here’s a brief inventory of what’s impacting U.S. financial markets right now:

• An escalating trade war with China and other global trading partners.
• A new national security advisor and a new WH economic advisor in place.
• An ongoing White House/Russia investigation – or show trial – depending on what side of the political fence you lean on.
• The Federal Reserve once again hiking interest rates.

As a result, the CBOE Volatility Index (VIX) – more informally considered the financial market’s “fear gauge” – is in gyration mode so far in 2018. According to VIX data, the index has skyrocketed more than 50 percent three times this year, an all-time yearly record for the VIX.

And there’s more than eight months remaining in 2018. With significant market uncertainty in the air, what’s an investment advisor to do?

The smart move, some money managers say, is to shift to a multi-asset portfolio approach to weather the storm.

“There are several risks looking ahead, including a Federal Reserve policy error that might see the central bank move too fast to raise interest rates, thereby extinguishing U.S. growth, and the possibility of failing to raise rates fast enough in the event of genuine inflation risk,” said Tom Elliot, international investment strategist at the deVere Group.

As for the trade issue, President Donald Trump’s chilling words on global trade aren’t the only worrisome developments, Elliot said.

Replacing Rex Tillerson as secretary of state with the more anti-China Mike Pompeo, “risks inflaming tensions between the U.S. and China,” he said. “Meanwhile, Xi Jinping’s self-appointment as ‘President for Life’ in China suggests a more autocratic style of government in Beijing.”ald

With an abundance of geopolitical strife in international trading bourses, the vibe is more cautious right now and the “buoyant mood” seen recently on Wall Street is not reflected on other major markets, Elliot added.

Striving for More Balance

With Fed policy and geopolitical risks in mind, Elliott is advising investors to weigh a mixed portfolio of equities and bonds. That will often offer negative correlations in a period of high market volatility.

“A multi-asset portfolio, with a suitable combination of global equities and bonds in a standard 60 percent equity and 40 percent bonds model offers a good combination of investment strategies while offsetting potential risk,” he said.

A trend toward multi-asset portfolios isn’t exactly new.

From the first quarter 2015 through the fourth quarter 2017 (the latest data available), assets under management in the Evestment.com All Balanced/Multi-Asset Universe rose from $903.8 billion to $1.03 trillion,” said Mark Scott, analyst for the company.

Scott lists the portfolio performance for that universe as follows:

• -0.21 percent in 2015
• +6.97 percent in 2016
• +12.56 percent in 2017

Moving the Numbers

Even in multi-asset models aren’t exactly a fresh idea this year, the concept is still a good one, others say.

“Clearly, all the political turmoil going on suggests that we should reduce our reliance on the very volatile stock market,” said Hany Shawky, interim dean of School of Business at the University at Albany.

His advice for investors skittish about the shaky global economic stage is a mix of 70 percent stocks and 30 percent bonds, with a good dose of international stocks and bonds.

“The current economic fundamentals justifies that allocation,” Shawky said. “Of course, the investors own risk preferences and their stage in life might significantly alter this ratio.”

Some money managers say that it’s not as simple as creating a 60/40 percent stock bond portfolio.

“You must dig deeper into each asset class, if you are seeking to outperform those indexes,” said John Anagnos, managing principal at Aetolia Capital in Greenville, Del. “If you’re not concerned with outperformance, then you should buy the cheapest index ETFs representing these sectors.”

To perform better than the indexes, the key is combining active and passive management, along with individual stocks, Anagnos said.

“Additionally, the allocation of bonds is not as simple anymore with a rising-rate environment,” he said. “You must look at liquid alternatives to hedge equities, as the multi-asset portfolio today is not what the 60/40 portfolio used to be.”

You must be more tactical or rebalance two-or-three times per year, he added.

Still others say the 60-40 model must go even further than that, with more of a diversity element included.

“The case for a multi-asset approach to portfolio management should not be limited to a simple 60/40 stock-bond allocation in any market environment,” said Patrick Healey, a financial planner at Caliber Financial Partners in Jersey City, N.J.

Healey’s firm employs an “endowment model” approach to portfolio management for clients. That includes a range of alternative asset classes such as commercial real estate, private equity, private debt and energy into clients’ overall portfolio designs.

“The ultimate goal is to provide more predictable risk-adjusted returns with less exposure to the traditional stock and fixed income markets,” he said. “When used properly, alternative asset classes can reduce the overall portfolio correlation and help guard against dramatic stock market corrections and black swan events.”

Time to Act?

Clearly, global economic events are reaching a boiling point, and money managers are ready to start making some changes in their investment portfolios, before the pot boils over.

The multi-asset model seems to be a good starting point, but many portfolio managers seem to want to go beyond the traditional 60-40 stocks and bond approach.

The times warrant such a move, they say.

“With the increased geopolitical ramifications and headline risk in our global economy today, relying on a 60/40 stock-bond portfolio just simply isn’t enough,” Healey said.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms. Brian may be contacted at [email protected].

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