Many of the large investment banks provide free analytical services on their web sites to registered investment advisers. One of the most interesting tools they provide is a scenario generator; a tool to shock the capital markets for external events to see how a portfolio will perform. Let’s take a look!
Depending upon the web site you visit, the available scenarios to test against vary a bit. Some common scenarios include COVID-19 Conquered and COVID-19 Continues, as well as more generic scenarios like Oil Spike, Inflation Spike, and Interest Rates Rise.
I am a firm proponent of long-term strategic investing targeted to a client’s specific objectives and not prone to making tactical shifts based on market outlooks, but I find it interesting to see how client portfolios would perform under different scenarios. I ran the scenario generator from the JP Morgan Asset Management web site and came up with the following statistics based on an income strategy I currently manage (see chart below).
As seen above, the Sample Income Portfolio performs better than the benchmark portfolio in half the scenarios (and worse than half!) while the variance amongst the scenarios is relatively small. My view is that this is the best anyone can do when trying to outguess external events. I would not be happy if the Sample Income Portfolio showed a strong bias in either direction implying bets are being taken on a specific scenario. In that case, I would need to re-think the management of that portfolio since I might be taking unknown bets.
Alan Greenspan, former Fed Chairman, is known for his outspoken opinions on all kinds of topics. His view on forecasting is well documented and goes something like this (paraphrased), “we aren’t very good at forecasting, but we must forecast since embedded in every portfolio is a market outlook.” So, in the above case, the embedded long-term strategic forecast of the Sample Income Portfolio delivers an outcome that mostly mirrors the benchmark to satisfy client objectives over different scenarios; a satisfactory result for most investors.