Investment advisers should follow the example of boxing great Muhammad Ali in dealing with a constantly changing market, according to a leading figure in the financial world.
The former heavyweight champion prepared for his legendary bout against George Foreman in the mid-1970s, known as the “Rumble in the Jungle,” by modifying his fighting style, said Mohamed El-Erian, chief executive of the global investment management firm Pimco.
Instead of emphasizing his trademark movement around the ring — “float like a butterfly” — Mr. Ali and his trainers developed what became known as the rope-a-dope. Mr. Ali absorbed Mr. Foreman's blows for seven rounds and then knocked out the exhausted challenger.
Mr. El-Erian used Mr. Ali as an example of someone who avoided what he called “active inertia,” which means addressing new challenges by doing more of the same thing.
“This is how we need to be able to respond if we are to navigate a volatile and uncertain world,” Mr. El-Erian told the audience at the annual conference of the Insured Retirement Institute in Boston this week.
The conventional wisdom of economic downturn and recovery has been overtaken by a new reality. “We no longer live in a cyclical world,” said Mr. El-Erian, whose company manages $1.4 trillion in assets. “We are living through a fundamental structural and secular change.”
One of the elements of this new financial world is that the “unthinkable” becomes reality. For instance, emerging markets are experiencing consistent growth and demonstrating fiscal rectitude while the developed world is staggering along at almost zero growth while groaning under massive deficits.
Mr. El-Erian also pointed to the example of the U.S. bond rating downgrade this summer following political warfare in Washington over raising the debt ceiling. He expressed deep disappointment in U.S. political leaders, saying that they are a major cause of market uncertainty because of their inability to deal with burgeoning federal fiscal imbalances.
“The drivers are policymakers and politicians,” Mr. El-Erian said. “The rest of us are sitting in the back seat wondering why they're so erratic.”
Advisers can't control what happens in Washington, but they can understand, anticipate, respond and adapt to the changing markets, Mr. El-Erian said. They have to be open to evolving conventional wisdom continually.
“Agility becomes really important,” he said.
They also have to manage expectations based on global opportunities and risk and use global multiple asset strategies. But simply diversifying portfolios won't be enough to hedge against “tail” events – unforeseen occurrences that roil markets.
“In today's world, diversity is necessary but not sufficient, because it doesn't address the tails,” Mr. El-Erian said. “You have to manage the tails much more actively. We have a whole desk that does nothing but that.”
Mr. El-Erian is optimistic that Washington will begin to calm markets by starting to tame the federal deficit. It will get a chance to show its seriousness through the bipartisan, bicameral joint committee that must submit a deficit reduction proposal by Nov. 23.
“Washington is starting to get it,” Mr. El-Erian said. “Hopefully, this supercommittee is going to be the beginning.”