Asset Allocation in the Shadow of a ‘Minsky Moment’

Derived from the work of Hyman Minsky, an economist, the ‘Minsky Moment’ is a theorized point where markets fall into full collapse. Given widespread geopolitical uncertainty and relatively stagnant economies in developed nations, there’s widespread concern that we might be approaching just such an inflection point. Only this month, Mervyn King, the previous Governor of the Bank of England, suggested that the world is sleepwalking into another economic and financial crisis as governments rest on the laurels of monetary policy.

Many asset managers are already reacting to the potential of a market shock, and are looking to review their asset allocation models. BNP Paribas Asset Management is a case in point. In its latest allocation outlook, the firm cited a ‘neutral’ position on equities and noted that risks are mounting in fixed income. Its analysis warns of a potential reflationary shock, for which fixed income markets in particular are not priced for. Another example is AMG Funds, which has warned investors to prepare for a downturn. As the firm points out: we’re 10 years through the current cycle and today’s high asset valuations are their highest levels since the 2001 dotcom bubble.

If we are at a Minsky Moment, asset allocations could change dramatically as firms move away from the equities market into more defensive investments. This is a significant piece of work. Not only will firms need to rebalance their portfolios, but for those that measure them against blended indices, they will also need to evaluate and rework each stated tracking benchmark. Even for a small firm, we’re talking about unpicking an extensive inventory of bespoke strategy models and indices to ensure they’re fit to measure the new asset allocation framework. For large firms, the number of indices could be in the hundreds or even thousands. What’s more, these bespoke indices need to be able to be edited on-the-fly as firms’ investment decisions shift to react to dynamic market conditions.

When we’re talking about change on the scale of a Minsky Moment, it’s arguably impossible for firms to make all the adjustments required to their portfolios and indices in a timely, operationally efficient and audited manner. This is where companies like RIMES come in. Drawing on our inventory of the index universe, RIMES can free firms of the need to manage their blended benchmarks and focus on what they do best: asset allocation.

As Andrew Barnett, Global Head of Product Strategy at RIMES, explains: “we take on the time-consuming job of altering blend weights and compositions of indices to match the target outcomes of given asset allocations, using industry best practices for the calculation and management of blends. We provide a fully automated service, and that translates to more efficiency and reduced operational risk when compared to in-house systems. In times of rapid change, this provides a significant competitive advantage for firms.”

Brett Schechterman, RIMES’ Head of Product for North America, added: “we view managed blended benchmark capabilities as adding real value to clients’ businesses. The next step is to deliver self-service capabilities so asset managers can build and manage these indices using simple, intuitive user interfaces via our next generation client portal. In the digital age, there’s no reason we can’t partition the complexity of index management from clients, while still giving them the choice of whether they want to build and maintain the indices themselves. It’s all about delivering the best user experiences and providing options to clients around how they use our services.”

With uncertainty mounting about what the future may hold for global markets, asset managers need every tool at their disposal. Leveraging blended benchmark management as a service from global experts is key to enabling scalable and efficient asset allocation operations.

RIMES’ Fully Managed Benchmark Data Service for Blends offers a strategic and flexible managed solution for blended benchmarks across multiple asset classes. Contact us to learn more

Read our factsheet: “Blended Benchmarks: Simplifying the management of blended benchmarks” here.

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