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No risk, no return

Systematic risk premia Investment classes bear various risks. Investors taking systematic risks are compensated by a risk premium in the long-run. Each kind of systematic risk thus represents a long-lived source of revenue and contributes positively to the expected return on the overall portfolio. Hence, mixed portfolios allow investors to profit from a wide range of risk premia. 

Which and how much risks? Portfolio management always implies risk management. Based on the individual risk capacity (risk budget) as well as on the return requirements, investors decide which and how much of the equity, interest rate, credit and further risks they are able to bear. Notably, equities make up a large part of the overall risk composition. The risk contribution of bonds tends to increase in the current low interest rate environment.

Risk contribution in a mixed portfolio
Risk contribution in a mixed portfolio

Risk management with the goal of avoiding losses of substance

Losses of substance as an issue While normal fluctuations are tolerable for the investor, crashes inflict heavy damages on the portfolio due to substance losses. Crashes do not only annihilate the return, but also the capital with which future returns can be generated. Stock market crashes are as “normal” as volatility – they seldom but regularly occur. Also, sharp interest rate rises and crises, sharp interest rate increases and crises in credit markets may lead to losses on bonds. 

Dynamic risk control Risk management should hence concentrate on reducing substance losses (drawdown management). A static asset allocation means that the investor fully bears all losses of substance. A dynamic risk control, however, enables investors to profit optimally from their risk budget. While the risk exposure is reduced over high-risk regimes, systematic risk premia can be efficiently earned during phases of lower risks.

Crashes in stock, interest rate, and credit markets
Crashes in stock, interest rate, and credit markets

Smart Beta: Systematically higher return per unit risk

Outperforming the market Investors have two possibilities to generate an outperformance. They can either select an active manager and trust in his forecasting skills (stock picking and timing capacities) and his experience. Or they can decide to seek for an outperformance using established, scientifically proven Smart Beta methods in a systematic and non-predictive way. 

Systematically more return per risk Active management often goes together with high costs, long term underperformance and lack of transparency. In contrast to this, Smart Beta approaches are characterized by systematic and transparent optimizations. Anticyclical rebalancing, diversification and/or the exploitation of additional return sources of return (factor premia) thus lead to the efficient management of equity investments.

Systematically higher return per unit of risk with Smart Beta
Systematically higher return per unit of risk with Smart Beta

State-of-the-art mixed portfolios: Dynamic risk control and systematic optimization

Finreon Multi Asset Solutions By means of an integrated risk management, Finreon Multi Asset Solutions dynamically manage the most important risks in the portfolio on a daily basis – namely equity, interest rate, and credit risks. Optimizations within the different asset classes further seek to generate a higher return on the taken risk. 

Robust portfolios Finreon Multi Asset Solutions are rulebased, free of any prognosis and fully transparent. Mixed portfolios are tailored to each client's specific risk budget and needs; fully risk-controlled and optimized. The goal lies in achieving a more attractive risk/return profile as well as more robust performance characteristics. Finreon offers state-of-the-art mixed portfolios for any risk profile.

Finreon Multi Asset portfolio
Finreon Multi Asset portfolio

Implementation possibilities

For further information about our mandate solutions, please contact us. In the context of mandates, balanced portfolios allow to be tailored to the clients’ specific needs and to be managed in a customized way. Finreon, as an independent investment advisor, collaborates with the partner of the clients' choice. Hence, the customer is assured to get the best specialist for each stage of the investment process.

The new investment group CSA BVG 25-45 Dynamic offers an innovative approach for tackling the challenges of the current market environment with its dynamic risk management. The most relevant risks in the portfolio (equity, interest rate and credit risks) are managed efficiently and in a simple way within the balanced portfolio. By combining an active, systematic risk control (Finreon) with the efficiency and transparency of passive solutions (Credit Suisse) in a single investment, investors benefit from the best of both worlds. 

For further information and detailed documents, please refer to the following links (only available in German):

Report (German)

Presentation (German)

Advertorial (April 2016) (German)


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