How has portfolio management thinking changed over the last few years? The shift in thinking has been dramatic with new language and focus. I am not referring to how academics think about portfolio management, but the thinking and language of investors or professionals who are doing the actual management. The discussion among investors is more sophisticated and focused on more greater detail. I have divided the change in thinking into six categories for discussion purposes. These six cover most of the change in thinking, weights, categories, diversification, choice, performance, and risk. Managers have incorporated the new thinking at different times but the general level of discussion has shifted radically.
Weights - Investor have moved beyond thinking only about capital-weighted allocations and have moved to a risk weighting focus. The advances in risk parity may be the most obvious example.
Categories - There is a growing movement away from the normal discussion of asset classes and greater discussion about the risk premiums associated with asset classes. This has not taken hold as well as other ideas but the discussion is shifting swiftly.
Diversification - Diversification is not about mixes of traditional assets, but the weighing of strategies and choices within the alternative space. Alternative are here to stay as diversifiers.
Choices - The choice in the old world was about asset classes. Now the focus is on strategy and factor exposures. How much exposure to inflation is becoming more relevant than discussion of how much exposure to bonds.
Performance - Performance discuss used to be just centered on total return. Now the shift has been on alpha generation and the management fee for beta. Hedge funds are especially feeling the pinch in this breakdown between alpha and beta.
Risk - Risks discussion used to only be focused on the standard deviation of the manager, asset, or portfolio. Now the focus is beta, downside risk, the tracking error versus a benchmark, and the active shares within a portfolio versus a benchmark. The ability to slice a portfolio into risk factors has increased significantly.
This is just a quick discussion, but most can see that the language of portfolio management has changed significantly.
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