Front Office Team Case Study in Asset Management

How do the front office members decide on protecting the portfolio against inflation?

• Economist - He/she shares his/her view that the ongoing fiscal and monetary policy stimulus to support the ailing economies from the Covid-19 pandemic raises the risk of potential inflationary pressures in the medium term, he/she doesn’t see an imminent threat as the economies are still way below their maximum output, but certainly a risk for the next 2-5 years.
• Strategist - The strategist highlights that in his/her view the inflation linked bond market is already pricing this in and therefore an expensive way of hedging that risk, yet he/she suggests other ways of protecting the portfolio against inflation in the future. Hence, the Strategist would recommend an allocation away from ‘fixed income’ towards ‘Alternatives’.
• Portfolio Manager - The PM before making any decisions carefully analyses what impact an increase in inflation would have on the portfolio, but also how imminent is the inflation likely to be.
• Quant Analyst - the PM asks the Quant Analyst to prepare a ‘what-if’ scenario to assess the impact of the portfolio should inflation rise by 2%, 4% or 6% over the next 12mths, 24mths and 36mths, and the impact this would have on the risk/return characteristics as well as the correlations across asset classes.
• Analyst - The PM asks the Analysts to consider the impact of potential inflation across their respective sectors and identify the companies within those sectors which are likely to do best or worst – hence identifying a potential ranking of corporates and sectors within this environment.
• ESG Specialist - Once the Analysts come up with a list of sectors and companies likely to benefit in this environment, the ESG Specialists provide their views across sectors and corporates. Having received a set of potential ideas across asset classes, sectors and companies and bonds, the PM works with the Quant Analyst to explore what this new potential model portfolio would look like.
• Trader - If the PM decides to implement these changes the necessary trades will be identified to shift the portfolio from where it is now to where it is intended to be under this new strategy.  Depending on the size and liquidity the Trader will work with his counterparties to ensure Best Execution.
• Client Portfolio Manager - Once the decision has been made, the policy enacted and the portfolio adjusted, the Client Portfolio Manager will communicate this change of view to both the business development team internally as well as to the clients they speak to.
• Product Specialist - The Product Specialist would also discuss this shift in perspective internally with the Business Development team, as well as with investment consultants and potential clients, to provide them with a recent example of how the decision-making process works in practice.
• Head of Team - He/She would have been a close observer of the discussions, cognisant not to disrupt the decision making process but at the same time making sure all the factors had been considered.
• Chief Investment Officer - He or she would be challenging the discussions whilst they were being made so as to ensure everything has been taken into consideration.