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Quick Clips
Quick Clips: New Rules of Diversification
September 9, 2022
Hear from AQR's Portfolio Solutions Group on the the prospects for stock and bond markets, the impact of macroeconomic risks on a range of investments, and the use of diversifying investments to fortify portfolios.
Alternative Thinking
New Rules of Diversification
Q3 2022
During the first half of 2022, equity markets tumbled around 20% from their peak, with losses on typical stock/ bond portfolios almost as large. More worryingly, this type of downturn may be unfamiliar to many younger investors: with inflation still high, there is little prospect of central banks riding to the market’s rescue. We assess the prospects for stock and bond markets after the H1 selloff, consider the impact of macroeconomic risks on a range of investments, and explore the use of diversifying investments to fortify portfolios.
Journal Article
ESG Ratings: A Compass without Direction
August 2, 2022
We examine the recent concerns about the reliability of the assessments of ESG ratings providers. We review the demand for ESG information, the stated objectives of ESG ratings providers, how ratings are determined, the evidence of what they achieve, and structural aspects of the industry that potentially influence ratings. We find that while ESG ratings providers may convey important insights into the nonfinancial impact of companies, significant shortcomings exist in their objectives, methodologies, and incentives which detract from the informativeness of their assessments.
Quick Clips
Quick Clips: The Stock/Bond Correlation
Q2 2022
For the past two decades, the stock/bond correlation (SBC) has been consistently negative, and investors have been able to rely on their bond investments for portfolio protection when equities sell off. However, macroeconomic changes – like heightened inflation risk – could push this key asset allocation input into positive territory.
Alternative Thinking
The Stock/Bond Correlation
Q2 2022
For the past two decades, the stock/bond correlation – a fundamental detriment of risk in traditional portfolios – has been consistently negative. However, this hasn’t always been the case, and a positive stock/bond correlation could reappear due to macroeconomic changes. In this article, we assess the broad implications this would have for investors and set out practical steps to prepare for such an outcome.
White Paper
Supply Chain Climate Exposure
May 1, 2022
To manage climate risks, investors need reliable climate exposure metrics, but such risks may be difficult to measure, particularly along the supply chain. Using broadly accessible data, we propose an intuitive metric that quantifies the exposure a company has to customers and suppliers. Our metric is related to scope 3 emissions and captures the strength of economic linkages as well as the overall climate exposure of a firm’s customers and suppliers.
White Paper
Building a Better Commodities Portfolio
April 22, 2022
Interest in commodities is rising again, thanks to their tendency to be particularly strong diversifiers during periods of rising or volatile inflation. We review what a “best-in-class” commodity portfolio looks like by exploring three potential enhancements to a passive approach to the asset class.
Perspective
Everything and More
April 4, 2022
My colleague and former classmate Antti Ilmanen is at it again with his second book, Investing Amid Low Expected Returns. Very rarely does a sequel stand up to the original (see Jaws II), but that's certainly not the case here!
White Paper
Time to Diversify – But into What?
Q4 2021
The last 10 years were exceptional for traditional stock/bond portfolios. But with stock market valuations near all-time highs and bond yields near all-time lows, prospective returns look bleak. We make the case for diversifying out of equities and explain the valuable role liquid alternative strategies can play.
White Paper
When Stock-Bond Diversification Fails
October 27, 2021
The events of 2020 to 2021 have increased uncertainty around the future path of inflation. We review how different inflationary outcomes can impact investor portfolios and evaluate what assets and strategies may enhance portfolio resilience to inflation.