Investors may benefit from revisiting their asset allocations and exploring the risk-reward tradeoffs associated with higher inflation.
2022 was one of the worst years on record for U.S. equity and bond markets, and one of the primary drivers was a sustained increase in the inflation rate. Three-month Treasury yields went nowhere but up, equities moved in the opposite direction, and credit spreads widened throughout the year. Looking forward, investors can anticipate fixed income returns to be 2% to 4% higher due to the current rate and spread environment. In light of these changes, investors may benefit from revisiting their strategic asset allocations.
In this white paper, What Did CPI Do to My SAA?, Conning discusses recent events in the markets and outlines a framework for exploring the risk-reward tradeoffs therein. Testing alternate allocation strategies using financial models and economic scenarios can help risk professionals gain insight into the factors that affect their profitability. Topics include the construction of efficient frontiers for investment portfolios as well as the appropriate choice of metric for the "reward," whether that be asset only, present value of distributable earnings, or economic value.
