Mitigating risk

The global stock market faces some investment risks that may not come into play in a U.S. stock portfolio, such as foreign currency fluctuations and foreign exchange markets. In addition, foreign stocks, particularly in the emerging markets, may be more volatile than most U.S. stocks.

“One of the main ways that we manage some of those risks is through diversification,” noted Monsen. “We don’t want to be overconcentrated in any single asset, and we have risks that offset each other. Even though individually there are some larger risks, the risk of the overall portfolio may be lower because of that diversification.”

With a portfolio that encompasses large-, mid- and small-cap domestic stocks, as well as stocks from both the developed and emerging markets—all managed through separate  managers—the Fund is broadly diversified. “At the top level," explained Spangler, “we look at our overall risk within the Fund, such as standard deviation returns relative to our peers, fundamental-based risk models and macro level risk models.

“For example,” he added, “we can stress test a portfolio by aggregating all the individual assets of our multiple managers into a composite, then compare it to our benchmark. In this process, we can determine whether we should include hedges and overlays to account for the portfolio’s sensitivity to material changes in monetary policy, rising/falling inflation or even shocks to commodity prices.”

When to sell

While buy and sell decisions of individual stocks are made by the managers of each strategy fund included in the Fund, the overall make-up of the portfolio is determined by an investment strategy committee that includes the head of the mixed assets group, the chief investment officer and the chief investment strategist.

“At the asset class level, portfolio managers and analysts present their views to the committee on their particular area of expertise,” said Spangler. “Along with that, we do a lot of quantitative  and macroeconomic research on both the U.S. and international markets to assess where we are in the economic cycle and what level of aggressiveness we should take when we see a market opportunity.”

Within the quantitative strategies in the portfolio, added Monsen, the investment team calculates a score for every stock in its potential universe, which is updated daily. They adjust the strategies regularly to assure that the characteristics stay in line with their objectives.

“The process of adjusting a strategy naturally results in some new stocks coming into the portfolio, some stocks being held and some stocks being sold,” explained Monsen. “So, the sell strategy is part of the overall strategy construction process, and it’s driven more by the characteristics that we’re looking for in the overall strategy than by the characteristics of any single security.”

Within each individual stock portfolio, the fund managers make their own decisions on which stocks to buy, hold or sell based on their own fundamental strategies and market outlook.

Active management

Active management can be particularly helpful in the global arena where the markets tend to be less efficient than they are in the U.S., according to Monsen. “There is more opportunity in the foreign markets to use quantitative factors to forecast returns to find stocks that may outperform the market overall. Active management also gives us an extra layer of risk management over the full portfolio that you wouldn’t get with a passive portfolio.”

But Monsen and Spangler agree that even with a well-designed, carefully executed strategy, investing successfully in the global market presents a wide range of challenges. “I think as soon as you believe you have all the answers, the market is going to prove you wrong,” said Spangler. “That’s why we have to continue to look at the markets in a very comprehensive and objective way and to take what the market gives us.”

“One lesson we’ve learned in the international markets,” added Monsen, “is that you’ve never seen everything. We’re always looking for something new that we haven’t seen before, something we need to learn in managing the portfolio in order to do a better job of either risk management or capturing alpha.”

To view recent performance and information on Thrivent Global Stock Fund (IILGX), visit thriventfunds.com.