Recently, a five-member committee appointed by the Norwegian government gave a big old nod to American musical icon Bob Dylan by awarding him the Nobel Prize in Literature. The committee is tasked with the annual selection of the 5 Nobel prizes awarded for peace, physics, economics, chemistry, medicine, and literature. The committee praised Dylan “for having created new poetic expressions within the great American song tradition." Why we think this is interesting is that the committee is in our opinion went outside the bounds of what you would traditionally think of as literature. Going outside the box if you will. Wouldn’t you typically think author and book, not singer and lyric for a literary award? Why this caught our eye was not the acknowledgement of Dylan’s 60 plus years of musical influences on US culture, but the Nobel committee’s selection of a unique category like song lyrics for its coveted prize.
Regardless of one’s musical preferences, no one should be surprised that a musician won the prize. Even Aristotle recognized musical poetry as one of three primary categories of poetry over 2,000 years ago—and no one doubts poetry as a literary style. We think the Nobel committee’s consideration of broad categories of literature is an apt parallel to our approach to portfolio construction. We have included investment options or strategies that go beyond the “traditional” stocks, bonds, and cash for years, and some of them are as old as Aristotle himself.
Why do we like such investments? It is because they can respond to market conditions differently than traditional investments, and as a result offer different ways to generate potential return. This is all the more important in a world where organizations like McKinsey Global Institute (see last month’s Notes) are questioning the assumptions held about future return expectations. We are constantly challenging ourselves not to get stuck in the past or not always revert to the familiar, but to consider multiple investment “options” for our clients and their portfolios. We want to learn from the past and use recent developments to our advantage, not be paralyzed by them.
With all the unprecedented elements of today’s investment environment (low interest rates, global debt levels, Britain leaving the EU, this US election season, etc.), market volatility is predicted to rise in the future. Volatility is one of the elements of the market that we have begun to use to our advantage. For many clients, volatility is used both as a part of our risk-management process and as an “outside the box” investment option. So, whether or not the outcome of the US election leads to a more stable market, we are paying very close attention to market volatility and using it not only as an investment tool, but also as a guide to help shape our equity portfolios. We also apply the same approach to the fixed-income side of client portfolios with the use non-traditional asset classes like reinsurance and real-estate.
We, however, can always challenge ourselves to rethink how these investments work together. Are portions of the investment portfolio nimble enough to adapt to the ever-changing and often confusing market data? Have we considered the “options”? To quote the Nobel prize winning Mr. Dylan, “How does it feel, ah, how does it feel? To be on your own, with no direction home—a complete unknown, like a rolling stone?” While the current market environment may make you “feel” this way, we are in the good company of the Nobel Committee with our willingness to be a little outside the box ourselves.