Morgan Stanley IM: A New Management Approach for a New Market Regime

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KEY TAKEAWAYS

• We are evolving our Global Balanced Risk Control (GBaR) strategy into a new management approach better suited for a new market regime, primarily focused on generating returns with risk-awareness
• What’s changing? Well, alongside this approach, we are adding fresh portfolio construction and implementation techniques.
• Why now? The structure of the market has changed, where correlation risks are now higher. We must adapt our approach or face suboptimal results.
• Our overriding goal is to achieve stable target risk-adjusted returns

Today’s new interest rate and inflation regime, which deviates significantly from the past 40 years, makes it more difficult to achieve stable target returns. We nonetheless believe this can still be achieved. How? By modifying one’s investment process that recognizes this change in regime and is complemented by unique portfolio construction and implementation techniques.

The downward interest rate cycle from 1981 – 2021 that spurred a massive bull market in bonds has now come to a screeching halt—and this changes everything. Why? In the simplest terms, interest rates have risen well above their previous lows, making diversification between stocks and bonds problematic, and stable returns harder to generate. We find this untenable and a problem for investors, something we discussed in detail in our whitepaper: The Case for Stable Risk Adjusted Returns: Why Now?

The good news? We offer what we believe is a viable solution.

^{Risk Considerations}

^{There is no assurance that the strategy will achieve its investment objective. Portfolios are subject to market risk, which is the possibility that the market values of securities owned by the portfolio will decline and that the value of portfolio shares may therefore be less than what you paid for them. Market values can change daily due to economic and other events (e.g. natural disasters, health crises, terrorism, conflicts and social unrest) that affect markets, countries, companies or governments. It is difficult to predict the timing, duration, and potential adverse effects (e.g. portfolio liquidity) of events. Accordingly, you can lose money investing in this portfolio. Please be aware that this strategy may be subject to certain additional risks. There is the risk that the Adviser’s asset allocation methodology and assumptions regarding the underlying portfolios may be incorrect in light of actual market conditions and the portfolio may not achieve its investment objective. Share prices also tend to be volatile and there is a significant possibility of loss. The portfolio’s investments in commodity-linked notes involve substantial risks, including risk of loss of a significant portion of their principal value. In addition to commodity risk, they may be subject to additional special risks, such as risk of loss of interest and principal, lack of secondary market and risk of greater volatility, that do not affect traditional equity and debt securities. Currency fluctuations could erase investment gains or add to investment losses. Fixed-income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes. Equity and foreign securities are generally more volatile than fixed income securities and are subject to currency, political, economic and market risks. Equity values fluctuate in response to activities specific to a company. Stocks of small-capitalization companies carry special risks, such as limited product lines, markets and financial resources, and greater market volatility than securities of larger, more established companies. The risks of investing in emerging market countries are greater than risks associated with investments in foreign developed markets. Exchange traded funds (ETFs) shares have many of the same risks as direct investments in common stocks or bonds and their market value will fluctuate as the value of the underlying index does. By investing in ETFs and other investment funds, the portfolio absorbs both its own expenses and those of the ETFs and investment funds it invests in. Supply and demand for ETFs and Investment Funds may not be correlated to that of the underlying securities. Derivative instruments can be illiquid, may disproportionately increase losses and may have a potentially large negative impact on the portfolio’s performance. A currency forward is a hedging tool that does not involve any upfront payment. The use of leverage may increase volatility in the Portfolio. Diversification does not protect you against a loss in a particular market; however, it allows you to spread that risk across various asset classes.}