Investment management in the new era can be defined as the art and science of efficiently spending institutional or individual investors’ dollar and risk budgets to help them achieve their meaningful wealth-/income-/consumption- or liability-driven objectives, subject to regulatory constraints. Addressing this challenge involves institutional and individual asset owners (or their investment managers) efficiently using a holistic risk management framework known as liability-driven investing or goal-driven investing. Whatever the context, meaningful investment solutions are based on three fundamental sources of added value: (1) the use of an efficient risky performance-seeking portfolio (PSP); (2) the use of an efficient safe liability-hedging or goal-hedging portfolio; and (3) the use of an efficient allocation strategy for efficient risky and safe building block portfolios.
The risky portfolio should be efficient at harvesting risk premia across and within asset classes: It’s all about diversification!
The safe portfolio should be efficient at matching risk factor exposures on the asset and liability sides: It’s all about hedging!
The allocation to the efficient risky and safe portfolios should secure investors’ essential goals while generating a high probability of achieving their aspirational goals: It’s all about insurance!