A recent PIMCO Viewpoints article explores the proper underpinnings of portfolio construction. PIMCO’s analysis indicates that asset allocation based on risk factors is more optimal than allocation by asset class.
In observing the differences between asset class and risk factor correlations the authors Sebastian Page and Mark Taborsky note:
Investors are often surprised by how seemingly unrelated risky assets and strategies suddenly become highly correlated with equities during a crisis
During crises, investors that have not directly diversified their risk factor exposures will find themselves holding two crude asset classes: 1) risk assets and 2) nominally “safe” assets (although all investments carry risk).
Obviously, this is clear validation for the view that understanding risk is the key to returns in this market.
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