Insights– AlphaPredictor Series

A Risk Targeted Approach to Multi-Asset with the AlphaPredictor Target Risk Indices

Multi-asset strategies continue to dominate investor flows in recent years, given their ‘plug and play’ solution to diversification. However, the approaches are often inconsistent over time, subject to manager discretion and not necessarily comparable even within certain risk profiles such as the ‘cautious’ or ‘balanced’ sectors. In that light, we felt it was time for a more transparent approach, one with rules based asset allocation methodologies, however, all designed to a given target volatility for a specific client type.

The AlphaPredictor strategies follow the highly regarded Parala asset allocation technologies, with significant institutional following. The AlphaPredictor approach is a forwards looking asset allocation technology, which using a sophisticated macro-economic model to identify the best performing asset class performance over a coming period, then provides target allocation strategies with specific allocations to equities, bonds and certain liquid alternative assets to meet a given target risk profile ongoing.

The suite consists of three multi-asset indices, each mapped to a given risk or rolling volatility target, which cover the risk specture from cautious to adventurous. Depending on that volatility target, each index has varying levels of allocations to equities, bonds and diversifying assets such as infrastructure consistent with their risk bucket.

Naturally, that would mean the more aggressive indices have greater exposure to more volatile, higher growth assets such as global equities, yet commensurately lower exposure to fixed income, as set out in the below chart.

Designed to offer diversification by asset class and by region, the indices comprise exposures to eight liquid asset classes including equities, bonds, gold, real estate, industrial metals, infrastructure, water and renewable energy.

The AlphaPredictor suite of target risk multi-asset indices give exposure to global equity markets, then further diversified by regions and sectors. Fixed income exposures themselves vary of time across government and corporate bonds, short and long maturities, inflation linked and nominal, driven by a forwards looking macro-economic picture. So whilst maximum exposures to equities, bonds and liquid alternatives are pre-set, the weights within those asset classes are managed according to the most attractive prospects each has going forwards.

Bonds are long considered to be the ‘portfolio stabilisers’ within a portfolio, and by including defensive assets such as fixed income into the AlphaPredictor Target Risk Indices, stability and downside protection is brought during extended bear markets. This is reflected in performances of the indices during 2002 and 2008, whereby the more conservative or less risk adverse indices outperformed those with higher exposure to equities.

When considering longer term results from a risk-reward perspective, the lower volatility of the more conservative indices is clear in the annualized risk of each index, (see Chart 4.) Unsurprisingly the more adventurous the index which investors gain exposure to is, over the longer term the highest the expected annualized returns as show before. Those investors with longer term investment horizon will usually be more growth focused and therefore will seek to have greater exposure to growth assets.

The AlphaPredictor Multi-Asset Target Risk Indices seek to go beyond providing a simple, transparent and consistent approach to gaining exposure to a diversified, risk graded portfolio. The AlphaPredictor macro-economic asset allocation technology uses machine learning capabilities to identify prevailing economic conditions, and novate towards those specific exposures, be that US or emerging markets, regional indices or sectors such as consumer staples or even liquid alternatives such as infrastructure and gold to ensure the right asset mix at the right time. By targeting a given volatility, the indices provide both investors and advisers alike, the ability to map with confidence a given targeted level of volatility to specific client preferences.

Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. Although endeavours have been made to provide accurate and timely information, we cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.


For more information and answers to any questions you may have, please contact us.

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