A Tailored Equity Approach for Foundations

Topics: , ,

Published on November 28, 2023

| 13 min read

Jim McHugh, Senior Managing Director, Business Development

Share:

Foundations find themselves standing at a significant crossroads. The traditional equity mandates, which have long been a cornerstone in the investment portfolios of foundations, now seem less adept at navigating the frequent regime changes driven by a convergence of unprecedented macroeconomic risks. Today, leaders in the foundation sector are exploring alternatives, seeking alpha in less efficient markets while diversifying risk. However, these alternatives often come with their own set of challenges, including reduced liquidity and demanding due diligence requirements.

As we delve deeper into this complex landscape, we propose a fresh perspective, an innovative approach that stands as a beacon of hope in these complex times. This all-season equity strategy systematically adjusts to short- and long-term risk cycles, offering a shield against tail-risk events and a potential source of novel alpha. It’s not just about adapting to the modern investment landscape; it’s about aligning with the unique demands and aspirations of foundations.

A New Alpha Source Through Adaptive Rebalancing

Efficient markets with low risk premiums pose a complex challenge for investors. The integration of macro factor trading with equities opens a unique avenue for alpha generation through adaptive rebalancing. This strategy capitalizes on market fluctuations by integrating a macro factor trading component to realign the equity portfolio when positions drift or market volatility spikes. The macro factor trading component is a modest 5% cash allocation used to collateralize a multi-asset, exchange-traded futures strategy. The component attempts to deliver a novel alpha source, greater alpha resiliency, more precise risk management, and a more favorable liquidity profile than most alternative investments.

This strategy capitalizes on market fluctuations by integrating a macro factor trading component to realign the equity portfolio when positions drift or market volatility spikes.

In this evolving scenario, the adaptive rebalancing acts as a catalyst, enabling foundations to navigate market “wobbles” with agility and foresight. It’s a strategy that goes beyond mere adjustments, aiming to transform market fluctuations into opportunities for growth and stability.

Alpha Resiliency in the Modern Investment Landscape

The modern investment landscape is characterized by time-varying risks (See sidebar: The New Market Order). Our all-season equity approach is designed to protect alpha from the adverse effects of left tail-risk events. It recognizes the unique demands of foundations, offering a portfolio that aligns with their aspirations and needs.

In this context, alpha resiliency becomes a cornerstone, ensuring that foundations can weather the storms of modern market dynamics without compromising their core objectives. It’s about crafting a strategy that is resilient, adaptive, and aligned with the long-term goals of foundations, fostering stability and growth in a fluctuating market environment.


The New Market Order: Time-Varying Risks

Driven by heightened macro uncertainties, a new equity landscape is emerging, presenting today’s investors with unprecedented challenges. Short-term market cycles have made it increasingly difficult to capture long-term alpha and preserve the integrity of portfolio diversification.

The new frontier of investing requires a fresh approach to equity investing that can address time-varying risks, including heightened volatility, frequent drawdowns, and shifting cross-asset correlations.

increasing volatility icon blue line on chart frequent and severe drawdowns icon red line on chart shifting cross-asset correlations icon
INCREASING VOLATILITY FREQUENT AND SEVERE DRAWDOWNS SHIFTING CROSS-ASSET CORRELATIONS
Market volatility has increased, with economic cycles, geopolitical uncertainty, algorithmic trading, and market sentiment contributing to this phenomenon. Increasing and time-varying volatility has significant implications for investors, as it can erode returns, increase the likelihood of drawdowns, and complicate the task of portfolio diversification. Today’s strategies must effectively manage heightened volatility while capturing alpha.

 

Drawdowns have become more frequent and severe in recent years. The magnitude, frequency, and duration of these phenomena require investors to be prepared and develop strategies to manage and mitigate drawdown risk. A well-designed portfolio should be able to weather drawdowns without compromising its long-term performance. Shifting correlations between asset classes can undermine portfolio diversification objectives, making it challenging for investors to construct portfolios that can withstand market fluctuations. By understanding how correlations change over time and incorporating this knowledge into their investment strategies, investors can improve portfolio resilience.

Precision Risk Management: A New Norm

Risk management is evolving. It’s no longer about avoiding risk; it’s about managing it effectively, especially the shorter-term risks brought on by macroeconomic events. The integration of macro factor trading into the equity mandate allows for fine-tuning of risk management strategies. This facilitates prompt adjustments to market exposure, aiming to skew outcomes more positively (Figure 1).

objective more positively skewed return distribution

In this new norm, precision risk management becomes a vital tool, enabling foundations to navigate the complexities of the market with a strategy that is both responsive and proactive. It’s about harnessing the power of innovation to craft strategies that are not only resilient but also capable of turning challenges into opportunities for growth and development.

Downside Convexity: A Practical Tool

Downside convexity is not just a theoretical advantage. It serves as a practical tool for buffering drawdowns, a critical concern for foundations. This strategy seeks to limit losses during market downturns, improving the “denominator effect” and preserving the funding status of foundations. (Figure 2).

low equities futures correlation offers potential convexity

In the face of market volatility, downside convexity emerges as a beacon of stability, offering a cushion that helps preserve the integrity of foundation portfolios. It’s a strategy that goes beyond mere risk mitigation, aiming to foster resilience and stability in a market characterized by frequent fluctuations and uncertainties.

Liquidity Provision: A Central Consideration

Liquidity remains a central consideration in this approach, aligning with the operational demands of foundations and utilizing markets known for their liquidity. This strategy resonates with the unique investment landscape that foundations navigate, offering a harmonious balance between liquidity provision and growth.

In this complex landscape, liquidity provision becomes a central pillar, ensuring that foundations can meet their immediate obligations without compromising their long-term objectives. It’s a strategy that recognizes the unique role that foundations play in society, offering a balanced approach that harmonizes growth and liquidity provision.

It’s a strategy that recognizes the unique role that foundations play in society, offering a balanced approach that harmonizes growth and liquidity provision.

As we navigate this intricate journey, we invite you to delve deeper into the nuances of this all-season equity approach. We believe it stands as a thoughtful response to the challenges faced by foundations in the modern investment landscape. It’s a testament to the power of innovation and deep understanding, reflecting a commitment to serve foundations effectively in this ever-changing global market.

To learn more about this innovative approach and how it can transform your foundation’s investment strategy, we invite you to learn more in our comprehensive paper that sheds light on this new paradigm.


For U.S. Investors:

The views presented are for informational purposes only and are not intended as investment advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation, or sponsorship of any company, security, advisory service, or fund nor do they purport to address the financial objectives or specific investment needs of any individual reader, investor, or organization. This information should not be used as the sole basis for investment decisions. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives. All content is presented by the date(s) published or indicated only and may be superseded by subsequent market events or other reasons. You should not rely on this information as the primary basis for your investment, financial, or tax planning decisions. While every attempt is made to ensure that all information is accurate, there is no representation or warranty, express or implied, as to the accuracy and completeness of the statements or any information contained herein. Any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.

Past performance cannot predict future results. Investing involves risk, including possible loss of principal, fluctuation in value, and total loss of investment.

Investing in futures is speculative, involves substantial risk, and is not suitable for all investors and is for designated institutional investors who have the resources and financial expertise to understand the risks and limitations of such a strategy.

This information may be restricted by law, may not be reproduced or referred to without express written permission or used in any jurisdiction or circumstance in which its use would be unlawful. We are not responsible for any unlawful distribution of this material to any third parties, in whole or in part. The contents of this material have not been approved or endorsed by any regulatory agency.

For Europe Investors:

The views presented are as of the date published. They are for informational purposes only and should not be used or construed as investment, legal or tax advice or as an offer to sell, a solicitation of an offer to buy, or a recommendation to buy, sell or hold any security, investment strategy or market sector. Nothing in this material shall be deemed to be a direct or indirect provision of investment management services specific to any client requirements. Opinions and examples are meant as an illustration of broader themes, are not an indication of trading intent, are subject to change and may not reflect the views of others in the organization. It is not intended to indicate or imply that any illustration/example mentioned is now or was ever held in any portfolio. No forecasts can be guaranteed and there is no guarantee that the information supplied is complete or timely, nor are there any warranties with regard to the results obtained from its use. Janus Henderson Investors is the source of data unless otherwise indicated and has reasonable belief to rely on information and data sourced from third parties.

Past performance cannot predict future results. Investing involves risk, including possible loss of principal, fluctuation in value, and total loss of investment.

Investing in futures is speculative, involves substantial risk, and is not suitable for all investors and is for designated institutional investors who have the resources and financial expertise to understand the risks and limitations of such a strategy.

Not all products or services are available in all jurisdictions. This material or information contained in it may be restricted by law, may not be reproduced or referred to without express written permission or used in any jurisdiction or circumstance in which its use would be unlawful. Janus Henderson is not responsible for any unlawful distribution of this material to any third parties, in whole or in part. The contents of this material have not been approved or endorsed by any regulatory agency.

Issued in Europe by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Henderson Investors International Limited (reg no. 3594615), Janus Henderson Investors UK Limited (reg. no. 906355), Janus Henderson Fund Management UK Limited (reg. no. 2678531), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Janus Henderson Investors Europe S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). Investment management services may be provided together with participating affiliates in other regions.

Janus Henderson and Knowledge Shared are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc. 

For Australian Investors:

This information is issued by Intech Investment Management LLC (Intech) and is intended solely for the use of wholesale clients, as defined in section 761G of the Corporations Act 2001 (Cth) and is not for general public distribution. Intech is permitted to provide certain financial services to wholesale clients pursuant to an exemption from the need to hold an Australian financial services licence under the Corporations Act 2001. Intech is regulated by the United States Securities & Exchange Commission (SEC) under U.S. laws, which differ from Australian laws. By receiving this information you represent that you are a wholesale client.

For informational purposes ONLY. This document does not constitute and should not be construed as investment, legal or tax advice or a recommendation, solicitation or opinion regarding the merits of any investments. Nothing in the document shall be deemed to be a direct or indirect provision of investment management services or an offer for securities by Janus Henderson Investors and its subsidiaries (“Janus Henderson”) and is not considered specific to any client requirements.

Anything non-factual in nature is an opinion of the author(s), and opinions are meant as an illustration of broader themes, are not an indication of trading intent, and are subject to change at any time due to changes in market or economic conditions. Janus Henderson is not responsible for any unlawful distribution of this document to any third parties, in whole or in part, or for information reconstructed from this document and do not guarantee that the information supplied is accurate, complete, or timely, or make any warranties with regards to the results obtained from its use. It is not intended to indicate or imply that current or past results are indicative of future profitability or expectations. As with all investments, there are inherent risks that need to be addressed.

The distribution of this document or the information contained in it may be restricted by law and may not be used in any jurisdiction or any circumstances in which its use would be unlawful. This document is being provided on a confidential basis solely for the information of those persons to whom it is given. Should the intermediary wish to pass on this document or the information contained in it to any third party, it is the responsibility of the intermediary to investigate the extent to which this is permissible under relevant law, and to comply with all such law.

This document may not be reproduced or used for any purpose other than evaluation of a potential investment in Intech’s products or the procurement of its services by the recipient of this document or provided to any person or entity other than the recipient of this document. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Past performance cannot predict future results. Investing involves risk, including possible loss of principal, fluctuation in value, and total loss of investment.

Investing in futures is speculative, involves substantial risk, and is not suitable for all investors and is for designated wholesale clients who have the resources and financial expertise to understand the risks and limitations of such a strategy.

The opinions are those of the authors are subject to change at any time due to changes in market or economic conditions. The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes.

Data source is Intech throughout unless otherwise indicated.

Janus Henderson and Knowledge Shared are trademarks of Janus Henderson Group plc or one of its subsidiaries. © Janus Henderson Group plc.