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Active Asset Allocation Solutions

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An overview of innovative dynamic asset allocation solutions: from academia to the investment world

An overview of innovative dynamic asset allocation solutions: from academia to the investment world

Published in: Economy & Finance, Business
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  • 1. A new approach to asset allocation Certified by
  • 2. Active Asset Allocation Solutions Implementations We Protect, You Perform Notre Vision Our Vision Active Asset Allocation puts in pratice a responsible approach to preserve the financial ressources managed for the long term, such as pensions of future generations By applying the state-of-the-art of the academic research to the investment world, Active Asset Allocation brings financial engineering to the service of institutional investors. The rare combination of academic expertise and investment experience allows Active Asset Allocation to help investors define and understand better their risks in order to manage them in a sustainable way Active Asset Allocation designs asset allocation solutions that help investors and asset managers to honor their commitments, either by optimising ALM for the former or by controlling the inherent risk of the assets for the latter Active Asset Allocation philosophy relies on portfolio insurance techniques that aim to better preserve capital and maximize performances within the constraints decided by each investor Conciliate security and performance comes with a perfect control of risk 2
  • 3. Active Asset Allocation Solutions Implementations We Protect, You Perform Our Métier NotreActivity Promote innovation within the asset allocation world thanks to our academic research and its application to the investment world Help the investor define the set of risks and thresholds that should not be exceeded Add value by creating a customised solution for the investor by adapting the asset allocation to his constraints and not to return forecasts Help asset managers design diversified funds (including target-date funds) capable of respecting risk parameters and preserving the invested capital Study and find in a stochastic environment (stress tests with at least 1000 scenarios) an optimal asset allocation between a protective «  core » and more risky «  satellites  » capturing the performance. The allocation will be based only on the risk limits that we have established with investors and that takes into account their particular needs and constraints, including regulation. Our decisions do not depend on mathematical forecasts of gains and losses Consider risk management as a new leverage of structural performance for asset management 3
  • 4. Active Asset Allocation Solutions Implementations We Protect, You Perform Our Activity Dynamic Allocation Client Input We identify your constraints and the asset classes you would like to invest in We design a customised model and test it in a stochastic environment Customization of solutions and stress test Monthly we propose a rebalancing of your asset allocation Protection in case of a sudden and unexpected event We monitor daily your portfolio and the level of risk We advise you on the asset allocation, you keep the control of your investments 4 We upgrade on an on-going basis our models thanks to our internal research Research and Innovation
  • 5. Active Asset Allocation Solutions Implementations We Protect, You Perform Our Expertise Notre Expertise Active Asset Allocation offers to private banks, asset managers and institutional investors its expertise in dynamic asset allocation, including in a ALM environment (presence of liabilities): approach based on risk management only a real alternative to diversification or tactical allocation, which did not produce the expected results these last years, especially when it comes to risk management and capital preservation a real alternative in ALM compared to fixed allocation strategies or de-risking strategies, the objective of which is to reduce exposure to risky assets when a threshold is reached in terms of capital Active Asset Allocation use state-of-the-art asset allocation models and a proprietary approach developed through research in finance, combined with extensive investment experience 5
  • 6. Active Asset Allocation Solutions Implementations We Protect, You Perform Publications relative to our les bases de Quelques publications décrivant approach notre approche “In defense of Pro-cyclicality”, IPE Investment Pensions Europe, Avril 2012, Adina Grigoriu “Risk Control through Dynamic Core-Satellite Portfolios of ETFs: Applications to Absolute Return Funds and Tactical Asset Allocation”, The Journal of Alternative Investments, Fall 2010, pp. 47 – 57, Noel Amenc, Felix Goltz, Adina Grigoriu “The EDHEC European ETF Survey 2010” – An EDHEC-Risk Institute Publication, May 2010, Felix Goltz, Adina Grigoriu, Lin Tang “Risk Control through Dynamic Core-Satellite Portfolios of ETFs: Applications to Absolute Return Funds and Tactical Asset Allocation” – An EDHEC-Risk Institute Publication, January 2010, Noel Amenc, Felix Goltz, Adina Grigoriu “Constructing Absolute Return Funds with ETFs – A Dynamic Risk Budgeting Approach”, Institutional Investor Journal, Fall 2008, Vol. 2008, No. 1: pp. 37 – 46, Noel Amenc, Felix Goltz, Adina Grigoriu 6
  • 7. Active Asset Allocation We Protect, You Perform Solutions Implementations Memberships and Labels Active Asset Allocation has developed a partnership with the Centre for Complexity and Interdisciplinary Studies in Finance (CCISF), a research centre from the University of Nice­Sophia Antipolis, promoting new and cutting edge interdisciplinary research on financial markets seen as complex systems. The research centre is supported by the CNRS ( French National Research Centre for Science) and the INRIA ( French National Research Institute in Computer Science) The ANRT (French National Agency in Research and Technology) is sponsoring the thesis of one of our research engineers with the collaboration of Active Asset Allocation and the University of Nice­Sophia Antipolis Active Asset Allocation received the seal of approval of «Finance Innovation», a centre from Paris EUROPLACE, encouraging young firms to develop innovative techniques in finance and is incubated by Paris Incubateurs Finance Active Asset Allocation is member of the French Institute of Actuaries Active Asset Allocation is member of the ACIFTE ( Association of Financial Advisers and Analysts authorised by the AMF, the French regulator) Active Asset Allocation has received the innovation award by the Entreprendre network 7
  • 8. Active Asset Allocation Solutions Implementations We Protect, You Perform Management Team Adina Grigoriu Olivier Hiezely Founding Partner - CEO Founding Partner - Chairman Adina has an actuarial degree, is a member of the French Institute of Actuaries and has 15 years experience in different finance fields, including quantitative modelling. Olivier has completed a MBA with EDHEC in 2008. He is an engineer with more than 20 years of professional experience in the field on organisation and information systems. An asset allocation specialist, she started her career as a derivatives trader. She then joined BNP Paribas Asset Management where she held several positions ranging from product manager to fund manager and head of ALM. She joined a spinoff of the EDHEC-Risk Institute in 2007 to develop the Dynamic Core Satellite approach and its application to institutional portfolios. During her career, Adina has advised numerous asset managers and institutional clients on designing and managing multi-asset portfolios, including hedge funds. He has worked for 18 years at L’OREAL and developed an excellent understanding of the challenges and the strategies involved in a multinational company. 8 He has extensive experience in both people and projects management. Olivier has a strong personality focused on results. During his career, he developed a culture of excellence and performance, along with good interpersonal skills.
  • 9. Active Asset Allocation Implementations Solutions We Protect, You Perform Structure et Organisation AACIF KPMG Apple MCS FUI 9 Cabinet Simon
  • 10. Active Asset Allocation We Protect, You Perform Solutions Implementations Our Values For those who trust us and those who will ilit sib on sp Trust y In An nov tic ati ipa on tio n Re Sustainability Security rely on academic research and put into practice the state-of-the-art of academia, design solutions to respond to specific client needs portfolio insurance, long term guarantee, preservation of assets ( ex: pensions) protect value, avoid excess of risk (in a downward or upward trend) Exigence Equilibre Respect Intégrité hS t Diversity Excellence Excellence ec Hig sp ta n Maîtrise adaptation to the environment and permanent reconsideration...with enthusiasm Re da rd s The Team cultures, men - women, variety of backgrounds and horizons software know-hows, mathematical calculus and modelling are internal expertises individual reliability to serve the team, personal stability 10
  • 11. Active Asset Allocation Solutions Implementations We Protect, You Perform Some of our valuable clients and partners 11
  • 12. Active Asset Allocation Solutions Implementations We Protect, You Perform Quelques conférences/séminaires dans lesquels nous Conferences avons présenté l’approche de gestion des risques October 2013, IPE 360, Noordwijk, Netherlands dynamique : exte June 2013, Factset Symposium, Monaco June 2013, Infinity Conference 2013, Aix en Provence April 2013, Assurfinance 2013, Paris February 2013, Matinale Affo ( French Association of family offices), Paris January 2013, Matinale EIFR, Paris October 2012, APG «Academic Advisory Board» seminar, Amsterdam October 2012, IPE 360, Windsor June 2012, IPE 360, Paris May 2012, Pitmans Trustees, London April 2011, Opal Financial Group, Investment Consultants Forum Europe, De-Risking Solutions : Liability Driven Investments, London December 2010, Collège Interdisciplinaire de la Finance, seminar Quantitative Behavioral Finance, Nice October 2010, Generali Investments, Pan-European Institutional Clients Conference, Istanbul May 2009, EDHEC-RISK, Edhec Institutional Days, Paris December 2008, EDHEC-RISK, Edhec Alternative Investment Days, London 12
  • 13. Active Asset Allocation Solutions Implementations We Protect, You Perform Our Customised Solutions for the Institutional Investors and the Asset Management Community 13
  • 14. Active Asset Allocation Solutions Implementations We Protect, You Perform Why ? (1) Active Asset Allocation has developed a set of quantitative tools able to simulate asset behaviors in a stochastic environment allowing to design dynamic asset allocation solutions based on risk management We use asset classes defined by the investor and the constraints he has to respect ( allocation min/max, risk limits, ...) as a working base Our studies allow to define for instances : the optimal mix between asset classes the strategic benchmark the fees structure if the objectives are achievable, and if necessary the possible adjustments to make so that the objectives can be met 14
  • 15. Active Asset Allocation Solutions Implementations We Protect, You Perform Why? (1I) The technology can be applied to different issues : for an asset manager : design of a balanced fund, design of a diversified bond fund ( sovereign, corporate, EM, high yields, ...), design of an equity fund with draw-down constraints for a foundation : preservation of endowments for a pension fund : inclusion of liabilities and management of the asset/ liability balance for target-date funds: the optimisation of the allocation depending on other parameters than the horizon in order to preserve part of the capital 15
  • 16. Active Asset Allocation Solutions Implementations We Protect, You Perform Our Solution to Manage the Assets: Dynamic Asset and Risk Management ( DARM) 16
  • 17. 8.0% Active Asset Allocation We Protect, You Perform 7.5% 7.0% Solutions Implementations 6.5% Limits of the diversification strategy 6.0% 5.5% The last 10 years have shown the limits of this approach : 5.0% 10 years ago, an investor who wanted 4.5% a performance of 7% would have chosen an 3.0% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0% 17.0% allocation 60% equities, 40% bonds Efficient frontier built on hypotheses at the end of 2001 Efficient frontier calculated with 2001-2011 risks an returns 8.5% 9.5% 8.0% Expected annualized returns 19.0% 7.5% 7.5% 5.5% 7.0% 3.5% 6.5% 1.5% 6.0% -0.5% 5.5% -2.5% 5.0% 4.5% 3.0% 5.0% 7.0% 9.0% 11.0% 13.0% 15.0% 17.0% 19.0% -4.5% 1.5% Annualized volatility 9.5% 7.5% 5.5% 3.5% 6.5% 11.5% 16.5% 21.5% Annualized volatility The results of a diversified allocation depend on the hypotheses of returns, volatilities and correlations: they are often wrong! 17
  • 18. Active Asset Allocation Solutions Implementations We Protect, You Perform Limits of the tactical allocation The tactical allocation aims to improve the performances of the diversified allocation under tracking error budget The allocation is regularly readjusted depending on views on the futur returns of assets (asset manager convictions or forecasts of a quantitative model) In any case, this implies relying on bets Performances are very volatile, from a fund manager to another and from a year to another 18
  • 19. Active Asset Allocation Solutions Implementations We Protect, You Perform DARM Principles Our DARM (Dynamic Asset and Risk Management) solution is inspired from portfolio insurance techniques : Division of the portfolio into two components : a component with low or less risk to protect the capital, and a component with more risk, which allows to capture the performance We aim to protect a certain level of capital that we materialise with a Floor But we have added important improvements : possibility to invest simultaneously in all the asset classes the investor wants to include in the portfolio ( and not only in one risk-free asset and one risky asset) Less risk of being fully invested into money market instruments (often the drawback of a CPPI) Variable multiplier taking into account market risk changes Management of several protection levels (floors)... Our solution can dynamically control the negative returns of a portfolio in order to limit losses without limiting the performance 19
  • 20. Active Asset Allocation Solutions Implementations We Protect, You Perform DARM solution: asset control Characteristics of the DARM solution: relies on risk management rules only does not require return forecasts and does not rely on past risk/return increase exposure to risky asset (Satellite) when it over performs Core & vice versa Portfolio Cushion generates accumulation of over performance = creation of cushion, i.e. greater exposure to Satellite DARM Innovations : Customised Model Inclusion of several assets Levels and types of floors adapted 20 New source of performance
  • 21. Active Asset Allocation Implementations Solutions We Protect, You Perform Stochastic universe Return distribution for DARM vs. Diversification DARM 1125 750 375 0 -0,5 1 2,5 4 5,5 7 8,5 10 11,5 13 14,5 10-year annualized returns 21 Number of simulated scenarios Diversification 1500
  • 22. Active Asset Allocation Implementations Solutions We Protect, You Perform Positioning of our DARM solution Traditional approach: diversification Traditional approach: tactical allocation Traditional approach: portfolio insurance Risk Parity Approach Our approach: Dynamic allocation Objective asset return asset return risk management risk management risk management Risk Measurement volatility volatility capital loss volatility, DD,VaR capital loss Asset Allocation Fixed allocation dynamic allocation given performance forecasts Fixed allocation defined by the insurance portfolio approach Dynamic allocation so as to have the same risk exposure within each asset class Dynamic allocation between the core and the satellite depending on the margin of error Benchmark cap weighted market indices cap weighted market indices - - - Performance Measurement overperformance compared to market indices absolute performance absolute performance absolute performance absolute performance Risk Management symmetric tracking error compared to benchmark symmetric tracking error compared to benchmark - - asymmetric tracking error Cushion management - - once the cushion is consumed, there are no more options to perform - the cushion is rebuilt by construction if consumed 22
  • 23. Active Asset Allocation Solutions Implementations We Protect, You Perform Our solution for Target-Date Funds: DARM Horizon 23
  • 24. Active Asset Allocation Solutions Implementations We Protect, You Perform Philosophy of Horizon Strategy We adapted DARM (Dynamic Asset and Risk Management), our solution that allows investors to maximize their performance while taking into account their risk constraints, to the requirements of retirement savings. In an environment where bonds offer returns that are no longer attractive, the DARM Horizon is a response to growing demand for savings products exposed to risky assets, but with an efficient risk control. It offers an alternative to current models of de-risking, which principle is hazardous when the risk-free asset is no longer risk-free. This solution relies on the utilization of several risk-controlled portfolios (DARMs), with different levels of risk. The capital is distributed among these portfolios by a desensitization that is no longer time-linked, but designed to progressively lock-in gains. 24
  • 25. Active Asset Allocation Implementations Solutions We Protect, You Perform Our strategy back-tested over a 15-year period DARM Horizon Performance of the strategy compared to the industry’s standard products in France 300 7,8% 250 Annualized Returns 200 Maximum Loss -10,8% Industry De-risking 150 100 Annualized Returns 50 0 4,6% Maximum Loss -17,8% 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 DARM horizon historical allocation to each asset class 100 % 75 % 50 % 25 % 0 % 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Equities Bonds 25 Cash
  • 26. Active Asset Allocation Solutions Implementations We Protect, You Perform Our solution for Investors with Liabilities: Dynamic Asset Liability Management (DALM) 26
  • 27. Active Asset Allocation Solutions Implementations We Protect, You Perform The need of a new Asset Liability Management On one hand, 2008 credit tsunami and market conditions ever since On the other hand, the lack of appropriate goals for pension funds: peers benchmarking instead of analysis of particular needs target absolute return instead of liabilities as a benchmark too much reliance on hypothesis and long term static allocation short term margin for error not taken into account ... have completely changed the pensions landscape Consequence: pension funds have witnessed a worsening in their funding ratios and are now concerned about being able to produce investment returns that are high enough to deliver their promises to members without jeopardising the financial health of the sponsor company in the process 27
  • 28. Active Asset Allocation Solutions Implementations We Protect, You Perform Traditional strategies in Asset/Liabilities Management Most common approaches currently used: Traditional LDI : takes the financial risks away by hedging the liabilities, BUT the funding gap is then only filled by contributions AND 100% funded situation might not be good enough given all the other risks that lay with the liabilities ( mortality, life expectancy, inflation, ...) Long term fixed allocation based on risk and return expectations needs accurate forecasts over the investment horizon and is not compatible with short-term constraints; when proven wrong, they require higher and higher returns and can lead to virtually infinite contributions Traditional De-risking : systematical switching from «growth» assets to «matching» assets when funding level improves on a «flight» plan to fully funded can be as bad as fixed allocation and can also lead to virtually infinite contributions Our solution is more comprehensive than traditional de-risking: the dynamic allocation is ongoing 28
  • 29. Active Asset Allocation Solutions Implementations We Protect, You Perform DALM principles Our Dynamic Asset and Liability Management solution is an extension of our DARM solution to the presence of liabilities Again, the portfolio is divided into two components : The Liability Hedging Portfolio (LHP), correlated to the liabilities The Performance Seeking Portfolio (PSP), invested in riskier assets, structured following the DARM approach Risk management is done through protecting a chosen level of funding ratio. The protection level can go up when the funding ratio improves The investment in the PSP depends not only on risk-aversion & market conditions, but also on the margin for error (i.e. how far is the actual funding ratio from the funding ratio we are trying to protect) De & Re Risking: Short term and Medium/Long term De-Risking Short term Re-Risking Short term decisions are predefined and do not involve market forecasts 29
  • 30. Active Asset Allocation Implementations Solutions We Protect, You Perform Design methodology of Dynamic ALM Asset Classes Interest rate curve Liabilities Generation of stochastic scenarios Creation of building blocks Best stochastic match for the Liability Hedging Portfolio Combine assets by pairs and find the best parameters to construct the PSP Liabilities analysis Statistical analysis Analysis of the distribution of the funding ratio, necessary contributions, surplus, expected return, volatility, max drawdown, etc... Finding of optimal parameters 30 Design of the DALM solution that best fits the pension fund liabilities stream and particular constraints, to ensure risk is properly managed no matter the scenario
  • 31. Active Asset Allocation Solutions Implementations We Protect, You Perform Strengths of our DALM solution Daily monitoring to ensure risk limits are not breached Monthly rebalancing to ensure asset allocation is optimal given the funding status of the pension fund and its long term goal Exceptional rebalancing if half of the risk budget has been used intra-month De & Re Risking features: Short and medium/long term De-Risking: in the short term, the allocation to the risky asset goes down as the funding ratio approaches the protection floor; in the medium/long term, protection floor moves upward as scheme funding level rises, helping to reduce probability that market gains and/or contributions are «squandered» by falling markets Short term Re-Risking: when the funding ratio moves away from the protection floor, the allocation to the risky asset goes up Short-term decisions are based on formula and do not involve market predictions 31
  • 32. Active Asset Allocation Solutions Implementations We Protect, You Perform Positioning of our DALM solution Traditional approach: focus on assets De-Risking strategy depending on a glide path Our solution: funding ratio management, focus on liabilities and their correlation with the assets Objective asset return wealth level funding ratio management Risk Measurement asset volatility asset volatility and funding ratio level funding ratio volatility (assets vs liabilities) Asset Allocation long term fixed asset allocation fixed allocation (ALM study) adjusted with de-risking as funding level thresholds are reached dynamic allocation between the core portfolio and the performance driven portfolio depending on the level of the funding ratio Benchmark cap weighted market indices cap weighted market indices liabilities Performance Measurement over-performance compared to the benchmark over-performance compared to the benchmark liabilities + x% Portfolio Monitoring quarterly, update of the asset allocation every one to three years on-going monitoring of the funding ratio, but derisking depending on the glide path on-going monitoring of the funding ratio to derisk and re-risk 32
  • 33. Active Asset Allocation Solutions Implementations We Protect, You Perform What you should remember from our solutions The Dynamic Asset and Risk Management (DARM) solution allows to take into account investors issues (capital preservation, regulation, ...) by redefining risk while respecting their constraints (going beyond volatility,VAR, ...) The DARM approach, inspired from portfolio insurance techniques, is an asset allocation strategy which offers an interesting alternative to the fixed allocation based on past data and to the tactical allocation based on forecasts Its extension to ALM (Dynamic Asset Liability Management) allows to manage the funding ratio volatility and to minimise needed contributions our experience with US pension funds shows a 30% (up to 50%) reduction in contributions over 10 years compared to other widespread approaches (traditional LDI, fixed allocation, de-risking) our results with French foundations and pension funds are much better than the results achieved by other asset allocation strategies Its extension to Target-Date Funds (DARM Horizon) allows to offer an alternative to current models of de-risking, which principle is hazardous when the risk-free asset is no longer riskfree. 33
  • 34. Active Asset Allocation Solutions Implementations We Protect, You Perform Examples of past missions and ongoing work Design of a dynamic risk management approach for a bond fund investing in international credit instruments and for a diversified fund Creation and implementation of a dynamic risk management solution for a fund of ISR funds (DARM) Analysis of the strategic asset allocation of a Dutch pension fund Creation of a dynamic risk management approach (DARM Horizon) for a DC pension scheme with different risk profiles Creation and implementation of a dynamic ALM (DALM) for the US pension fund of a FTSE 100 company Creation and implementation of a dynamic risk management approach for two French foundations 34
  • 35. Active Asset Allocation We Protect, You Perform Solutions Implementations Notredifference Our Différence We qualify risk management parameters by adapting them to the strategy of each single investor and in accordance with regulation We determine the risk budget that will be used precisely to protect capital and capture performance. We communicate to the investment comittee an action plan for unexpected situations We determine ex-ante the signals (for instances the alert thresholds or the opportunity levels) that allow to take relevant and efficient asset allocation decisions between a «core» and «satellites» We capture, register and calculate the very numerous data needed for the simulations and studies that will indicate the best asset allocation options after a qualitative analysis of the results. Our strong investment experience is a major advantage while interprating the results of our models We design and implement complex models in accordance with the state-of-the-art of asset allocation techniques. Such models are created in the best possible conditions of reliability, solidity and efficiency. They are improved constantly thanks to our internal research, which provides clients with continuous progress 35
  • 36. Active Asset Allocation We Protect, You Perform Solutions Implementations Key figures 420 Million Euros advised and monitored daily 35% of ressources affected to research, development and innovation www.aaaic.com contact@active-asset-allocation.com
  • 37. contact@active-asset-allocation.com www.aaaic.com

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