Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
Franklin Templeton analyses the rising corporate and household debt wave
We observe that the debt wave is at a historic peak in terms of the US dollar value of the debt in issue and appears set to continue growing. This was sustainable with low inflation and plentiful liquidity. These factors have both reversed, leading to a heightened urgency to raise capital. As a result, the traditional view on “fiscal responsibility” seems to have moved from the mainstream of political and economic policy debate to the fringes. Given several secular trends in place, this “wave” is apt to grow in depth and breadth. This process drives an increasingly structural polarization between those countries that can easily continue to issue debt and refinance and those that cannot. This paper focuses on household and corporate debt, assessing the “quality” of investments and the implications of high inflation and high interest rates on investment risk and returns.
