The geopolitical risk is an essential investment concern for asset managers, much relevant to their portfolio decisions.
In this article at Enterprising Investor, Luren Goodwin explains that by monitoring dislocations and applying geopolitical risk analysis, the asset managers can mitigate its adverse effects on the portfolio development.
Integrating Geopolitical Risk as an Investment
Many investors believe geopolitical risk analysis is a sheer waste of vital resources that can deliver tangible benefits to the business. However, the author suggests that it can play an important role in asset allocation decisions if integrated well into the investment process. Here are a few smart ways to do so:
- Set the Risk Management Goal: For the top-down portfolio management, the geopolitical risk matters a lot in easing the trade-off between resource allocation and alpha generation. If you evaluate the significance of geopolitical risk analysis, focus only on what directly contributes to the investment goals.
- Quantitative Focus: The growing complexity of investment management has led to the development of chic yet quantitative risk management techniques. Geopolitical risk can be used as a tool to build, resource, and balance quantitative and qualitative methods.
- Build & Resource A Process: Once you decide to incorporate geopolitical risk into your process, focus on its execution. The approach need not be complicated, but well-structured and consistent. Set clear expectations, define roles appropriately to maintain time management, and acknowledge the mismatch. Foresee your internal strengths and trim down external research inputs, where you do not see comparative advantage.
- The Armchair Executives: Over-participation by C-Suites may hamper resource management. However, good executive buy-in throughout the geopolitical risk analysis might help in time allocation. Thereby, keep the leaders informed of priority risks to channel their impulses and effectively pressure-test the team’s thinking.
Click on the following link to read the original article: https://blogs.cfainstitute.org/investor/2019/04/02/geopolitical-risk-in-portfolio-management/