Are There Opportunities in Volatile Markets?

Managing director of AB’s alternatives and multi-asset arm says the current market environment is rife with opportunities.

Before taking on the role of managing director leading AB’s Alternatives and Multi-Asset Group, Richard Brink’s career focused primarily on building fixed-income portfolios.

It was enjoyable work, he tells PLANSPONSOR, and it’s also given him an interesting perspective into the way investors react to increasing risk and volatility in the markets—as they currently are.

“I think the one blanket statement to make regarding the current market environment is that bouts of volatility, while uncomfortable in many respects, are actually normal from a historical perspective,” Brink explains. “It’s the previous five years of really smooth returns that were somewhat abnormal. We saw remarkably consistently growth characterized by central bank policies essentially pre-paying people for future returns, based on the promise of future economic growth and the support that would come with it.”

U.S.-based equity markets in particular saw really strong average returns, Brink says, with the S&P 500, for example, climbing 17% on average per year between 2010 and 2014. Perhaps more important than the strong top-level growth was the fact that widely different asset classes had all continued to perform well, boosted as they were by easy global monetary policy, Brink adds. This meant low dispersion and high inter-market correlation across regions and economies, giving investors a deep sense of comfort and security with the markets that lasted for years and soothed lingering fears from the financial crisis.

Simply put, the last quarter of 2015 and the rocky start to 2016 have really shaken that confidence and corrected people’s understanding of the way markets work, Brink says. “Suddenly winners and losers have reemerged in the equity markets,” fueled not by the actions of market-overseers or regulators but instead by the fundamental cyclical and systemic factors. This implies greater and greater asset class dispersion and single-stock dispersion in coming years, Brink predicts.

NEXT: Tailwinds for alternatives?

With all this in mind, Brink still has no problem describing the current market environment as rife with opportunity, both for institutional investors and advisers.

“The opportunity is still out there to find strong performers and to build portfolios that are very strong from a risk-versus-reward perspective,” he notes. “[Y]ou do actually have to be able to identify and pick the winners, however. It’s an environment in which the boats are more important than the tide, if you want to say it that way.”

Plugging for the portfolio pros in his own firm and others, Brink says the emergence of greater volatility and market risk has boosted plan sponsors' and advisers' interest in alternative investments, “and anything else that promises to help smooth the ride.”

“For advisers, this will mean the notions of relative value capture and downside value protection will really be front and center in client conversations,” Brink notes. “This, in turn, means advisers are looking for new modules, tools and strategies around alternatives products due diligence, for example—that’s one area of focus for us. They’re looking for new ways to help investors in alternatives portfolio construction.”

Like others familiar with the intricacies of defined contribution (DC) plan investment menus, Brink feels alternatives will best serve investors in a “behind-the-scenes type approach.”

“This is one of the interesting parallels between the fixed-income work I used to do and the alternatives work I focus on now,” Brink concludes. “Oftentimes, the investments that do the most good for an average investor’s portfolio are not necessarily going to be easy to understand or use correctly, so it’s probably going to be important to have them packaged, say in a target-date fund or through some other pre-diversified vehicle. Otherwise the opportunity to make mistakes and overlook really important nuance is strong. Alternatives are clearly in this camp.”