Multi-asset portfolio management

The Challenge

Topic: Multi-asset Portfolio Management

As an analyst in the Capital Markets team, your Chief Investment Officer (CIO) has sent you an email outlining a research project that she wants you to undertake:

Hi,

Can you please undertake a portfolio research project for me? I have recently attended a few interesting investment forums outlining some potential structural changes in investment markets.

Below are my key takeaways, as well as some research and analysis I would like you to undertake!

• On the balance of probabilities, I believe inflation is going to be structurally higher over the next 5-10 years. I believe the market isn’t pricing in this possibility.
• My view is based on new, structural changes in the market which I believe central banks will look through (I’m not worried about more rate rises). The structural changes I am thinking about are decarbonisation and deglobalisation.
• I believe decarbonisation will be inflationary as businesses/governments make the transition to ‘net-zero’, and markets are currently overlooking the transition spending in their inflation forecasts. Additionally, I believe the globalisation trend that has pushed prices down over the past 20 years is reversing and is a potential inflationary pressure that is being overlooked.
• I am keen to understand how this will impact our current portfolio, and what mitigating steps we can make to potentially protect ourselves from structurally higher inflation.

I am looking forward to seeing what you come up with!

Kind regards,

CIO.

The Task

Part #1 – Research:

Q1): Commodities and real estate are seen as ‘traditional’ inflation hedges for a portfolio. Pick one of these two asset classes and undertake an academic literature review, focusing on the following questions:

• What characteristics of the asset classes do academics attribute to its inflation hedging ability?
• What are the pros and cons of the asset class as an inflation hedge?
• What are the key drivers of risk and return for the asset class?

Q2): Academics have pointed to other ‘non-traditional’ inflation hedges for a portfolio, including timberland and resource equities. Pick one of these two asset classes and undertake an academic literature review, focusing on the following questions:

• What characteristics of the asset classes do academics attribute to its inflation hedging ability?
• What are the pros and cons of the asset class as an inflation hedge?
• What are the key drivers of risk and return for the asset class?

Part #2 – Analysis

Q3): Using the data provided, undertake portfolio analysis and focus on the following questions:

• How does the current portfolio perform historically in periods of higher inflation?
• How do the asset classes you focused on in Part #1 complement the current portfolio in times of inflation?
• What other metrics can you point to that might support/undermine the addition of these asset classes to the portfolio?

Part #3 – Recommendation

Q4): Based on the academic evidence and your own portfolio analysis, provide a recommendation to the CIO and focus on the following questions:

1. a) Do you recommend that an inflation hedge be implemented?
2. b) If yes, which asset class (single or multiple) would you recommend, and how would you weight this in the current portfolio?
3. c) If no, what part of your research and/or analysis has led you to this decision?

Download the full investment case document for hints and tips.