Resiliency required during volatile times (but seeds should be planted early)

Views from the TIAA General Account

It’s natural to question your investment strategy when faced with extreme and unexpected events. We’ve seen this before during the Global Financial Crisis, the early stages of the pandemic and, most recently, with the Russian invasion of Ukraine. As investors, we can’t plan for these sorts of unknowns. But we can plan for uncertainty by creating portfolios that will be resilient across a multitude of different economic scenarios.

That’s the approach we take with the TIAA General Account. We want to avoid overreacting in the short term, either to risk or opportunity, that could result in a less productive portfolio over the long term. Stretching for near-term optimality usually makes a portfolio less resilient in the long run. So how do we do avoid that? By using a three-layered approach to portfolio construction and risk management.

The first layer of our strategy is appropriately measuring and setting our risk appetite. We need to clearly understand and articulate what our appetite is, the range of outcomes that we’re willing to accept, the risks we have in the portfolio and how they will react across various economic and market situations.

The second layer is diversification. Appropriate levels of investment diversification are important because we could be wrong in our assumptions about what may happen in the world or we could face risks that we don’t yet understand or cannot imagine. The more diversified an investor is the more this impact can be lessened. Extreme events could be one-offs, but they also have the potential to spread with global ramifications. Setting up broad diversification before these events occur is the best way to defend a portfolio in these circumstances.

The third layer involves tactical allocation or repositioning on the margins. We’re not talking about changing the strategic asset allocation, or broad thematics, but there may be near-term opportunities to alter the risk profile at the margins depending on how a particular situation is playing out. We’re meeting frequently with our country specialists, portfolio managers, research teams and risk management teams to understand the implications of the current crisis. For example, we may incorporate a view on the changing inflation outlook. The ongoing pandemic and China’s zero-covid policy, which has the potential to limit certain economic activity and lengthen supply-chain issues, combined with the impact of the war in Eastern Europe is adding to the existing inflationary pressures. The Russian invasion has implications for agriculture and related positions because Russia is a big exporter of fertilizer. These geopolitical events are also fueling discussions about the outlook for globalization, which has implications on emerging market investments, especially those that are more susceptible to food, currency and energy price issues.

This careful three-layered approach allows us to create a portfolio that is more resilient under most economic circumstances, as opposed to trying to optimize for one economic situation and paying a price if we get that wrong. It helps us understand how much risk we’re prepared to take in our portfolios and allows us to build portfolio resiliency by planting the seeds of prudent risk management early to be able to reap the benefits when the environment turns stormy.

We know bad things can and will happen, but we just don’t know exactly what they will be or when they will happen. So we’ve built an adaptive process that allows us to stay flexible and respond to the changing environment.