Today’s historically low real yields make many investors wonder: are we due for a period of rising real yields? If they rise, how fast will they rise and how significantly? How will this impact our portfolios? Should this be a concern and if so, what can we do to protect ourselves?
In this article, we will briefly address these questions, provide evidence on the effects of rising real yields on investment returns, and suggest approaches to portfolio construction that we believe will better prepare investor portfolios for a number of scenarios, including rising real yields.
These portfolio construction techniques rely less on making macroeconomic forecasts and more on significant diversification. Our preferred methods to increase diversification are risk parity to better capture market returns and the addition of uncorrelated return streams in the form of diversified long/short style premia.
Why would we suggest these for those concerned about rising real yields – haven’t we heard the oft repeated statement that risk parity will underperform in a rising yield environment? Yes we have. However, risk parity is, in fact, not so easily predictable. As it turns out, risk parity may do well – or poorly – in a rising-yield environment, just as more traditional portfolios may thrive or suffer. The difference, however, is that risk parity does not depend on what one asset class does, precisely because it is balanced.
Read the full white paper at the link beneath Related Files.