The COVID-19 pandemic was an unprecedented global shock, revealing significant vulnerabilities in investment portfolios worldwide. For both institutional and individual investors, the crisis served as a stark reminder of the need for investment strategies that can withstand unpredictable market disruptions. Outsourced Chief Investment Officer (OCIO) services have emerged as a comprehensive solution that not only helps investors navigate volatile markets but also effectively safeguards assets during periods of uncertainty.
This article, the first in a series, discusses the critical role of asset allocation and diversification, examines a case study on portfolio performance during the pandemic, and demonstrates how OCIO services, along with advanced investment oversight and aggregation platforms, empower investors to act diligently during economic crises. Future articles in this series will explore additional benefits of OCIO services.
The Importance of Asset Allocation and Diversification
At the core of any resilient investment strategy lies effective asset allocation and diversification. Asset allocation involves distributing investments across asset classes with differentiated risk drivers such as equities, fixed income, real estate, and alternatives, aiming to optimize the risk-return profile. Diversification extends this principle by allocating across sectors, geographies and investment style within each asset class, thereby reducing concentration risk. Together, these mechanisms mitigate the impact of one economic event or idiosyncratic risks thereby supporting more stable long-term capital preservation and growth.
During periods of market stress, such as the COVID-19 pandemic, portfolios concentrated in one asset class, sector, or region often experienced sharp declines. In contrast, well-diversified portfolios benefitted from the stability of uncorrelated or negatively correlated assets. These assets cushioned losses in impacted areas with stability or gains in others. Strategic asset allocation thus ensures that investors are not overly exposed to the risks associated with any particular market segment.
Case Study: The Impact of Concentrated Portfolios During COVID-19
To highlight the effectiveness of diversification, consider an investor whose portfolio was primarily concentrated in Saudi public markets due to their familiarity with the domestic economy. Within equities, the allocation was largely focused on banks and energy companies, complemented by a broader exposure to the Saudi bonds and sukuk investments.
In 2020, Saudi banks and energy companies were among the hardest hit sectors, as the COVID-19 shock triggered a sharp collapse in oil prices, weakening earnings for energy firms while increasing credit risk and compressing margins for banks. At the same time, spreads on Saudi government and corporate issuers widened, causing the domestic bond market to underperform the global bond market.
As shown, the investor’s portfolio experienced a nearly 1.09% loss in value, largely due to its heavy concentration in segments relatively more impacted by the pandemic.
OCIO-Diversified Portfolio
An OCIO framework places strong emphasis on diversification and protection against single-market shocks. Such an approach would have identified both the portfolio’s exclusive exposure to the Saudi market and its concentration in specific sectors as key vulnerabilities, making geographic and sector diversification a central objective.
On the equity side, a more diversified allocation within Saudi equities (extending beyond banks and energy companies) would have been proposed, alongside additional exposure to U.S., EAFE and Emerging Markets Equities. A similar principle would apply to fixed income, diversifying beyond Saudi bonds and sukuk to include global bonds, emerging-market debt, and U.S corporate bonds.
A thorough assessment of the investor’s investment horizon and risk tolerance at the beginning of the year could have also supported a higher allocation to equities (60%) relative to fixed income (40%). Under such an OCIO-constructed allocation, the investor would have generated an estimated +9.88% return in 2020, outperforming the original portfolio by approximately 10.97%. For a $10 million portfolio, this represents roughly $1.1 million in avoided losses, clearly demonstrating the tangible benefits of disciplined diversification and institutional portfolio construction.
How OCIO Enables Quick, Informed Investment Decisions
OCIO services provide investors with real-time, professional oversight of their portfolios, leveraging expertise in asset allocation, diversification, and risk management. One of the key advantages of OCIO services is their ability to continuously monitor exposure across various asset classes, sectors, and geographies. This insight allows investors to make better informed decisions when facing emerging risks like those seen during the COVID-19 crisis.
Investment Oversight Platforms (IOPs), which are often integrated by OCIO providers, provide granular transparency into portfolio holdings. These platforms can instantly identify concentrations of risk, such as overexposures to volatile sectors or regions, enabling timely rebalancing or hedging decisions. In the early days of the pandemic, investors using OCIO and IOPs were able to diligently identify and mitigate risk exposures, reallocating assets to segments less likely to be affected by the crisis.
Additionally, OCIOs employ sophisticated scenario analysis and stress testing to predict how portfolios may perform under various adverse conditions. This proactive approach ensures that portfolios are not only diversified but also dynamically managed, ready to adapt to shifting market conditions.
OCIO as a Self-Funding Investment Strategy
The COVID-19 pandemic underscored the immense value of professional investment management and advanced portfolio oversight. By ensuring strategic asset allocation, continuous diversification, and rapid response to market events, OCIO services can help investors avoid significant losses and position their portfolios for long-term growth. In many instances, the value preserved and generated by OCIO more than offsets its fees, making it a truly pandemic-resilient investment strategy that ultimately pays for itself.
For more information about our OCIO services, please contact your relationship manager.
Reference Indices Used in Case Study
Fixed Income:
Saudi Bonds/Sukuk: Tadawul Sukuk/Bonds Market Index
Global Bonds: Bloomberg Global-Aggregate Total Return Index - Hedged USD
U.S. Corporate Bonds: Bloomberg US Corporate Total Return Value Unhedged USD
Emerging Market Bonds: J.P. Morgan EMBI Global Diversified Composite
Equities:
Saudi Banks: Tadawul Banks Index
Saudi Energy Companies: Tadawul Energy Industry Group Index
Saudi Diversified Equities: Tadawul All Share Index
U.S. Equities: S&P 500 Total Return Index
EAFE Equities: MSCI EAFE Net Total Return USD Index
Emerging Market Equities: MSCI Emerging Markets Net Total Return USD Index
