Geopolitical Risk in Portfolio Management

Geopolitical danger has at all times been an vital funding concern. The query for asset managers in the present day isn’t whether or not these dangers are a drive for volatility, however whether or not that drive is related for portfolio selections.

In some circumstances, the reply is an unambiguous sure. Agile, risk-tolerant portfolios can make the most of shifts — short-term or structural — introduced on by geopolitical danger. By monitoring dislocations and making use of geopolitical danger evaluation, these managers can cushion the blow of adversarial occasions and improve upside development potential, producing alpha.

For different traders, nonetheless, geopolitical danger discussions drain assets with out delivering any tangible profit.

Geopolitical danger performs an vital function in our asset allocation selections on New York Life’s Multi-Asset Options group, and we’ve recognized a few helpful methods for integrating it into the funding course of.

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Set the danger administration purpose.

Does geopolitical danger matter in your portfolio administration group? It feels like a easy query, but almost all groups wrestle with the tradeoff between useful resource allocation and alpha technology. It’s not in regards to the chance of affect, which is a given, however whether or not getting ready for it’s price your group’s assets. Will your evaluation result in significant enchancment in outcomes?

For some funds, significantly these with top-down portfolio administration approaches, once more the reply is sure. Different corporations give attention to functions tangential to the portfolio administration course of: advertising and marketing, gross sales, networking, and government help, for instance. Whereas these pursuits are reputable, they warrant totally different ranges of effort out of your group.

As you weigh the significance of geopolitical danger evaluation, focus solely on what straight contributes to your funding objectives.

Think about your quantitative focus.

The growing complexity of funding administration has led to the event of refined, usually quant-driven danger administration methods. Geopolitical danger will be — however isn’t at all times — served by these instruments. Correct and well timed information is missing for a lot of nations, and main shifts hardly ever develop as anticipated, which might make quantitative signposting each arduous and unrewarding.

As you construct and useful resource your geopolitical danger administration operations, steadiness quantitative and qualitative strategies. Even probably the most refined quant funds use thematic overlays for monitoring geopolitical developments. Generally easy qualitative situations, enhanced by quantitative measurement and pressure-testing, are the perfect instruments in your aims.

Cover image of Risk Tolerance and Circumstances book

Construct and useful resource a course of.

After you have determined whether or not to include geopolitical danger consciousness into your course of, give attention to how you try this. Your method doesn’t need to be sophisticated, however it have to be structured and constant.

Begin with setting clear expectations and duties. For some funds, an all-in give attention to exterior threats could also be applicable. For others, such an method would unfold analysts too skinny. Clear roles decrease wasted time and distractions.

It’s doable — even seemingly — that geopolitical dangers demand extra consideration than your group can handle. If that’s the case, acknowledge the mismatch. Differentiate “must-have” from “nice-to-have” evaluation. Think about your inside strengths and lean on exterior analysis inputs the place you don’t have comparative benefit.

What does a profitable course of appear to be?

There is no such thing as a one-size-fits-all method to managing geopolitical danger, however there are strategies that will help you work smarter — not tougher — and hold your group centered.

Priorities: Extra headlines don’t at all times imply extra danger. Prioritize your dangers utilizing clear standards. Greatest observe suggests assessing at the very least “chance” and “affect.” The extra seemingly and significant a danger, the extra bandwidth it deserves. Actionability is a vital consideration as effectively: Are you able to do something if the danger turns into actuality? And what about optics? Are you able to ignore one thing, or will that seem negligent? The velocity with which you’ll tackle a possible danger is one other affect.

Situations: Growing situations and signposts can assist focus your course of. Geopolitical dangers seldom evolve in a linear trend, making them troublesome to watch and assess. State of affairs planning can assist mitigate dangers, seize alternatives, and in any other case strengthen your danger administration course of.

Situations can take the type of qualitative evaluation, quantitative measurement, or each. A easy framework for qualitative situation constructing begins with a base-case evaluation of the most definitely final result. From there, you may take into account different futures, with a give attention to what constitutes a change in key dangers.

Signposts: How will you inform if danger is rising or falling? Then what? Signposts are helpful metrics to trace how your prime dangers could develop. Good signposts are based mostly on the assumptions you’ve made upfront in regards to the situation and assist decide whether or not a danger is materializing. Think about qualitative signposts like occasions or statements in addition to quantitative ones based mostly on monetary or financial information. Share them throughout your group. If a signpost is triggered, have your group decide what it means in your portfolio. If signposts are quantified and automatic, guarantee your merchants know the subsequent steps.

Concentrate on coverage, not politics: Figuring out the proper signposts takes some trial and error. One method to separate sign from noise is to differentiate politics from coverage. Political developments can point out modifications within the danger’s chance or velocity of evolution, however analysts will be knocked off track by following politics too carefully. Concentrate on actual financial or enterprise outcomes.

African Capital Markets: Challenges and Opportunities Graphic

Beware the armchair government.

Over-participation by management in geopolitical danger discussions can create a drag on assets, particularly given the expansive nature of those conversations. Executives current concepts or headline dangers to stoke creativity or complete evaluation, however the hearth drills this creates can derail an in any other case well-structured methodology.

Good government buy-in all through the method helps to allocate everybody’s time extra successfully. Maintain your management knowledgeable of precedence dangers to allow them to channel their impulses and successfully pressure-test your group’s considering.

Mitigate dangers, capitalize on alternatives.

An efficient method illuminates dangers and alternatives amid uncertainty, however course of can solely take you to date. When the time comes, you need to act on the intelligence you could have. Danger response will be worrying and impede creativity in the meanwhile when it’s wanted most.

Translate robust planning into robust execution. On the finish of the day, you might be balancing not solely danger and reward, but in addition effort and reward. Groups that handle this steadiness effectively might be higher ready to guard towards — and make the most of — geopolitical danger.

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The textual content of this text is ©New York Life Funding Administration LLC.

All posts are the opinion of the writer. As such, they shouldn’t be construed as funding recommendation, nor do the opinions expressed essentially mirror the views of CFA Institute or the writer’s employer.


There is no such thing as a assurance that the funding aims might be met.

Previous efficiency isn’t any assure of future outcomes, which can fluctuate. All mutual funds are topic to market danger and can fluctuate in worth.

This materials represents an evaluation of the market atmosphere as at a particular date; is topic to vary; and isn’t supposed to be a forecast of future occasions or a assure of future outcomes. This info shouldn’t be relied upon by the reader as analysis or funding recommendation relating to the funds or any issuer or safety specifically.

The methods mentioned are strictly for illustrative and academic functions and aren’t a suggestion, provide or solicitation to purchase or promote any securities or to undertake any funding technique. There is no such thing as a assure that any methods mentioned might be efficient.

This materials incorporates normal info solely and doesn’t take note of a person’s monetary circumstances. This info shouldn’t be relied upon as a major foundation for an funding choice. Relatively, an evaluation needs to be made as as to if the data is acceptable in particular person circumstances and consideration needs to be given to speaking to a monetary advisor earlier than investing choice.

“New York Life Investments” is each a service mark, and the frequent commerce title, of the funding advisors affiliated with New York Life Insurance coverage Firm. IndexIQ® is the oblique wholly owned subsidiary of New York Life Funding Administration Holdings LLC and serves because the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs, and NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is positioned at 30 Hudson Road, Jersey Metropolis, NJ 07302. ALPS Distributors, Inc. isn’t affiliated with NYLIFE Distributors LLC.

NYLIFE Distributors LLC is a Member FINRA/SIPC.NYLIFE Distributors LLC is positioned at 30 Hudson Road, Jersey Metropolis, NJ 07302. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Lauren Goodwin, CFA

Lauren Goodwin, CFA, is an economist and strategist for New York Life Investments’ Multi-Asset Options group, which manages over $11 billion in shopper options. Beforehand, she served in economics and technique positions at Wells Fargo, Frontier Technique Group, and JPMorgan Chase. She holds a BA in worldwide relations, international enterprise, from the College of Southern California, summa cum laude, and an MA in worldwide economics from Johns Hopkins SAIS.

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