Forward Management Study: Active Asset Allocation Is a Prudent Strategy

The market downturn has stood conventional wisdom about portfolio construction on its head, leaving many investors worried about market risks and unclear which way to turn. In a new white paper by Forward Management that both challenges traditional portfolio construction and serves as a rationale for its own investment product, the San Francisco-based company argues that the traditional “set-it-and-forget-it” approach to asset allocation is formulaic and passive, and says that investors now have a good reason to seek methods better suited to the times.

The paper, released on Thursday, June 17, says that traditional risk management, addressing investor concerns about underperforming the markets and volatility of returns, led to the creation of conservative portfolios that were fully invested in stocks and/or bonds with a small cash allocation, that were well diversified and that were periodically rebalanced to adapt to a changing market outlook. But recent experience has shown that market moves can quickly erase asset value. Now, many investors are more concerned with avoiding losses than with outperforming benchmarks, the paper says.

What works in the new investment climate? Active asset allocation, according to Forward: the continuous, nimble management of market exposure. “In these uncertain times, the more prudent strategy is likely to be the one that manages market exposure, rather than one that is invested 100% long at all times regardless of how managers view market trends,” the study says.