Institutional Allocation Spotlight

In 2024, diversified portfolios saw strong results primarily due to exceptional returns from public equity, suggesting investors may be considering rebalancing trades to reduce equity exposure in favor of other asset classes. Rebalancing has the potential to enhance long term performance and can serve as a crucial risk management tool, as drifting from a strategic allocation can make a portfolio riskier, less diversified, and less efficient. Given the highly concentrated nature of recent equity performance, investors may want to consider less traditional rebalancing strategies, such as redeploying capital within broader equity markets, maximizing diversification and flexibility in fixed income mandates, and seeking compelling opportunities beyond public markets.

Active and passive strategies both have roles to play in asset allocations. As we explore in this paper, the use of these styles should be tailored to the specific characteristics of each market segment.

Recent events have introduced greater uncertainty into the traditional 60/40 portfolio model, prompting investors to explore alternative methods for managing equity risk. Explore how option-based approaches like call writing and collared equity can provide new sources of income and downside protection to enhance portfolio resilience.

Building a shadow liquidity pool that blends liquidity, stability and return will allow investors to manage cash flows without return drag, sidestep rebalancing challenges and ultimately make it easier to achieve the return targets for which private investments were chosen.

Simple mechanical rebalancing, unless structured correctly and applied narrowly, has the potential to damage performance

The alignment of vast pools of long-term capital with environmental, social and governance principles has the potential to generate positive returns for both society and portfolios.