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Investment Approach

Risk-based strategies (i.e. risk parity) have traditionally been managed with a single policy portfolio that seeks to balance risk across broad asset classes. Adaptive Risk Allocation builds upon this approach, utilizing an adaptive policy function that allows the portfolio manager to allocate to one of four established policy portfolios based on prevailing market conditions. The team uses a four-step investment process for managing assets employing an adaptive policy portfolio approach.

The portfolio is constructed using both securities and derivatives tied to global equity markets, global inflation, global interest rates, and credit spreads.

Distinguishing Features

Adaptive policy portfolios

  • Unlike in traditional risk allocation strategies, the team takes a flexible approach, making allocation decisions in response to changing market conditions

A process built on a long history of close observation of the markets

  • Large, experienced team supporting asset allocation strategies
  • Philosophy and process built on more than 40 years of historical market data

Investment Process

Step One: Identify Market State
The identification of market state is the first step of our investment process and is at the philosophical heart of the strategy. The team uses market-based indicators to identify among four distinct market states: bearish, neutral, bullish and highly bullish. The indicators for determining market state are built on more than 40 years of historical data and include interest rates, inflation, momentum, volatility, and valuations.

Step Two: Set Strategic Policy Portfolio
Once the market state has been identified, the team selects the respective strategic policy portfolio, which allocates risk across five broad asset classes: global equities, global inflation, global rates, spreads and cash.

Step Three: Apply Tactical Overlay
The team then employs the firm's well-established global asset allocation research process to make tactical allocation decisions and to adjust the policy portfolios. Three broad areas of analysis are conducted: top-down/macro-economic analysis, asset class analysis, and cross-asset valuation analysis.

Step Four: Portfolio Construction
The team constructs the portfolio using cash, futures, swaps, options, active strategies, equities, bonds, and ETFs. Capital is carefully deployed to balance liquidity, alpha, and opportunistic market exposures.