Andrew Sharp Paul: So, if we move on from focus then, so how you think about focusing risk, how you think about managing risk across a multi-asset portfolio, SAA vs TPA, and then think about flexibility. So, obviously with markets becoming increasingly more volatile, uncertainty, all the same stuff kind of bubbling up to the surface, how do you think about flexibility within your approach?
Steve Gorman: So, we think about it in a few ways. So, on the one hand, again, in a multi-asset portfolio, flexibility means a wider array of things than saying it’s simply an equity-only portfolio.
So, we think about it from an active asset allocation perspective. So, getting back to our earlier discussion around whatever beta footprint your portfolio has, you just may need to course correct. You may need to deal with fluctuation in market environment. And that's a natural part of either tactical asset allocation. So by tactical asset allocation, this is the multi-asset team, based on its views over, say, the next 12 months, changing the weight in equities or changing the weight in government bonds, because we see a headwind or a tailwind that may be in place.
Andrew Sharp Paul: Pulling the top levers.
Steve Gorman: Yep. Exactly. That's the top-down piece. And the other thing we will do, because in a multi-asset setting, you are investing your capital with underlying managers, whether they're an underlying stock picker or an underlying bond picker, whatever the case may be.
But some of the strategies, and specifically on the fixed income side, will have the ability to move sub-asset allocation. So less top down, now more bottom up. But whereas we may be looking at duration or sort of government bond exposure at the aggregate, they may have the ability from more micro asset allocation levers to say what we really like is asset-backed securities here, or what we really like is this subset of emerging market bond countries.
So, when we're putting the portfolio together, part of the dynamism or flexibility we build is coming at the asset allocation decision from the top down, as you mentioned, and then from the bottom up in terms of some of the security selection experts that have a more focused view on it. That creates the, what we think, a nice balance in terms of asset allocation from sort of very local experts to top-down experts.
The other thing, so that's the asset allocation piece. The other part we will do is we will again, depending on client objectives, and specifically depending on their risk appetite, we’ll invoke a process which we refer to as active risk control. But, essentially, the spirit of it is an insurance policy of sorts. It's a way to introduce some hedging into the portfolio or some risk management, but to do it in a way that doesn't come with the typical costs of a permanent hedge, because, at that point, why don't you just take down the risk of the overall portfolio?
So that dynamism will be a little bit more short-horizon oriented, maybe focused on the next month or three. But the whole point is to try to get hedges in place before you need them, but not so they're carrying and dragging on the return all the time. And then, ideally, to monetize those hedges, or to claim your insurance, so to speak, in a more quick fashion, because in asset markets, they generally go up. And so, if you're too slow with your hedging, not only do you risk missing the event, but even if you're good at getting into the event, if you can't monetize those hedges, you don't really have much to show for it. So that's another unique form of dynamism.
Andrew Sharp Paul: If you think about both of, well, all three of those kind of flexible tools that you utilize, one thing that kind of comes straight to the top of my mind when you're talking through them is that it seems to add tracking error. It seems to add active risk to a multi-asset portfolio. So, how do you think about that benchmark-relative risk? I mean, appreciating that there's always a spectrum between TPA and SAA as we discussed, but there's still that active risk that comes from all three of those levers. How do you think about managing that risk across your portfolios?
Steve Gorman: So, this gets to the overall risk budgeting that you do when you think about a portfolio. Because in our parlance, what we typically do, and again, whether you're a TPA advocate or an SAA advocate, you're basically going to decide what would I like? Do I have an appetite for a structural data footprint? And if I do, what might that look like?
If you were in a benchmark-relative setting, the first question you have to ask, again, is what if I want an effectively different tilt in those benchmarks, a different strategic asset allocation over time? And then how much risk would I take on that front? So that would again fall under the SAA umbrella, even in a benchmark-relative world. But you're deciding, essentially, how much do I want to lean into my five-year views? Because that's just for the sake of simplicity, say that's what the SAA is. It's how much conviction do I have in those SAA views?
So, when we think about these risk-budgeting decisions, the two questions we're asking are our own conviction or confidence in each of the active decisions that we've either talked about or will, and then the appropriateness of the fit given the client mandate.
And so, you know, we typically don't work in a vacuum. The client will have certain parameters that they've given us, or the prospect will. And there'll be certain desires, either on the risk management or return objective front, that will help guide us, meaning sometimes we have clients that just can't do active security selection, or they're skeptical of it for whatever reason, and they're more comfortable with tactical asset allocation. So that will naturally be a bigger piece of the risk budget because they're comfortable with it.
Conversely, we may see the opposite, where they're skeptical of the ability to add value in TAA, and so they're going to want more security selection risk in there. So that forms a constraint on the process.
But all else equal, I think what you would see from us is balance is better in these portfolios. That leads to the resilience that I'm guessing you've mentioned already. But balance is better. And so, if possible, we'd like a balance between each active risk source. So, we'd like to achieve that. And then from there, constraints and other considerations will pull us off an initial balance point.
