The key to successful active management in periods of elevated uncertainty is not to stake everything on single-point forecasts. Rather, it is the ability to apply detailed policy analysis to a range of scenarios, and to maintain enough portfolio flexibility to respond rapidly and with high conviction as soon as uncertainty starts to resolve itself toward a specific outcome. Furthermore, the ability to populate the portfolio with diversified investment ideas, rather than a few macro positions, is essential if managers hope to generate alpha while keeping active risk under control.
Market liquidity has been good. Investor flows can be invested rapidly and efficiently. But can they be invested wisely when we know so little about the future? They can – but only through an investment process that is solidly grounded in fundamentals, granular enough to generate diversified ideas, forward- rather than backward-looking, and not too strongly anchored to preconceptions about how economic policy and financial markets must function. Investors should ensure that they have exposure to a broadly diversified set of investment themes and can benefit from active management that can respond with agility and flexibility to a rapidly changing policy environment.