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An introduction to Risk Factor Portfolios

By Fred Vosvenieks, Consulting Actuary, Milliman & Russell Ward, Consulting Actuary, Milliman

There is growing interest in risk factor based investment portfolios as an alternative to traditional asset allocation methods. In this article, we look at how risk factors directly address some of the main weaknesses of traditional methods and review the practical challenges that will need to be tackled ahead of more widespread adoption.

Traditional Thinking

Investment portfolio construction has traditionally centred on the idea that a superior outcome in terms of risk versus return can be achievedby investing across uncorrelated assets. However, all too often, the concept of risk has been equated somewhat myopically with a single measure, volatility, which is at best a proxy for the uncertainty associated with future asset returns. Alongside the simplifyingassumption of fixed correlations between asset classes,this has led to investment strategies that combined ‘growth’ assets with ‘defensive’ assets but whichultimately provided neither to the end investor.

We can observe that the historical weaknesses in constructing resilient portfolios have been driven by a fundamental misunderstanding of the dynamics of risk and the sources...Read More

Psychometric-Based Investment Suitability & Enhanced Trust

By Paul Resnik, Co-founder and Director of FinaMetrica

It's difficult to trust someone who delivers negative surprises. What we see in the successful branding of cars and clothing for instance, is a consistency of client experience. Be it premium or utilitarian, purchasers mix and match based on their needs and perspectives; e.g. “I need a premium car because I have five children to chaperone around but 'Marks and Sparks’ will be fine for my underwear”.

In both cases I am likely to be a happy customer if my expectations have been met. My trust in the brand's promise is maintained or weak...Read More

Effective LDI in a Rapidly Changing Environment

John Dewey, Managing Director, Client Strategy Team, BlackRock Solutions

Unprecedented events have become a regular feature in the financial markets since the Lehman default in 2008, putting further pressure on already stretched funding ratios and heightening the need for an effective LDI approach.

Pension schemes and other institutional investors continue to face challenging times. Economic conditions remain tough and despite some progress, persistent uncertainty in relation to the eurozone continues to weigh on investors’ minds. This in turn has led to a toxic combination ...Read More

Milliman Protection Strategy and liability-driven investing

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Lifestyle Actuary

The trappings of fast paced city lifestyles rarely take into account the charm and elegance that a room, a dinner or a cup of tea can afford; characteristics lost to a by-gone era of debutante balls and black tie for dinner.

The Luddite

Sam Richardson looks into the up and coming and the outgoing of the technology and gadgetry world in 2014.

Travelling Actuary

This month Travelling Actuary Eve Hartridge takes us to Greece's very own Emerald Isle located in the heart of the Ionian Sea, Corfu.

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