Clients typically ask for simpler analysis process, proven strategic choices, less manual processes and the minimum operational risks, an unified platform, certified algorithms and MiFID compliance. According to Morningstar and its famous research of 1986 about 93% of the returns from investement were due to asset allocation. Today, the landscape is roughly the same: market movements and asset allocation, accordind to Morningstar 2010 updates, make more of 90% of returns. Just the remaining part is due to active portfolio management. We can say that model portfolio and asset allocation are the cornerstone of investment services.

Approaches, Advantages, and Limits of Asset Allocation

The strategic asset allocation is the basic framework of the investment process and the first important choice to do. The complex set of variables to manage needs a structured rules system and tools for selection, pruning and normalization.

As we recently explained, one of the most important algorithms used for this purpose is the mean-variance optimization (MVO) made by Markowitz. Then there is Black & Litterman estimation: this model enables investors to combine their unìque views regarding the performance of various assets with CAPM market equilibrium returns in a manner that results in intuitive, diversified portfolios. We implemented also Black & Litterman to give further support to our customer.

The final result of analysis and studies is the legendary efficient frontier: the set of optimal portfolios laying on the same frontier offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.

You can roll down the curve from a portfolio to the next, or jump from a portfolio to another by matching among different frontiers. The final result is the choice of one or more portfolios,

In order to drive the best portfolio selection, in addition to the combìnation of risk and return, other parameters are available, such as rolling volatility or long term volatility, Value at Risk, Conditional Value at Risk, or relative measures as tracking error volatility and so on.

MiFID compliant model portfolios

The goal is to deliver the best results with the least uncertainty and risk, implementing the most used and recognized algorithm in the market, hiding complexity and creating a platform that is integrated with client platform.

Today we suffer too many risks due to a wrong asset allocation process. We assign bad model portfolios to customers, we postpone adapting to market changes, we ignore information tracing… It’s pivotal to leverage a homogenous process, less manual operations (and possible mistakes), with a quantitative and certified approach, real-time portfolio adjustments and MiFID compliant model portfolios.