Intro
FACTOR RISK MODELS DESIGNED FOR OVERSIGHT

Risk models are only truly useful to asset owners and consultants
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page one
FACTOR RISK MODELS DESIGNED FOR OVERSIGHT

Risk models are only truly useful to asset owners and consultants
if you can offset the exposures you don't want

Risk Models Built with Passive ETFs as Factors

Asset
Owners

Detect statistically significant evidence of security-selection skill that is likely to persist.

Avoid funds taking too little active risk to ever overcome fees… even with skill.

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Investment Consultants

Offset risk from unintended market exposures with ETFs or better fund combinations.

Avoid closet-indexing the aggregate portfolio.

9

Asset
Managers

Identify and offset unintentional systematic risk exposures that can overwhelm skill.

Identify key contributors to idiosyncratic risk.

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Wealth
Managers

Win and retain more business with superior manager selection,  oversight, and risk management capabilities that high net worth clients value.

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Benefits to Asset Owners and Consultants

Conventional Barra-type risk models use factors that are not directly investable. This precludes allocators from acting on model insights, which begs the question, “what use is the information?”

Our models, equally robust, use only passive ETFs as factors.

For allocators, this changes everything.   For the first time, allocators can:

Separate return due to security selection from return due to unintentional passive risk exposures…. and detect statistically significant evidence of security selection skill.

Offset the unintended passive exposures that can overwhelm skill.

Identify and avoid the one-third of funds taking too little active risk to ever compensate for fees — even assuming skill.

Ensure the aggregate portfolio is taking sufficient security-selection risk to justify fees and has no hidden risk exposures.

 

Comparisons with Conventional Risk Models

Risk and Skill Analytics

Type
Brinson / Active Share
Robust

No

Intuitive

Yes

Validation

Easily Disproven

Investable Factors

N/A

Accurately Measure Current Risk

No

Quantify all Current Drivers of Future Performance

No

Distinguish Active from Passive Risk

Attempted

Offset Unintended Risk Exposures

No

Minimize Unintentional Passive Risk while Maintaining or Increasing Active Risk

No

Detect Statistically Significant Evidence of Security Selection Skill

No

Cost
Low

Conventional Barra-Type Factor Models

Type
Factor Risk Models
Robust

Yes

Intuitive

No

Validation

Can be Proven

Investable Factors

No

Accurately Measure Current Risk

Yes

Quantify all Current Drivers of Future Performance

Yes (but less meaningful)

Distinguish Active from Passive Risk

No

Offset Unintended Risk Exposures

No

Minimize Unintentional Passive Risk while Maintaining or Increasing Active Risk

No

Detect Statistically Significant Evidence of Security Selection Skill

No

Cost
High

Peer Analytics Passive-Factor Risk Models

Type
Factor Risk Models
Robust

Yes

Intuitive

Yes

Validation

Easily Proven

Investable Factors

Yes

Accurately Measure Current Risk

Yes

Quantify all Current Drivers of Future Performance

Yes

Distinguish Active from Passive Risk

Yes

Offset Unintended Risk Exposures

Yes

Minimize Unintentional Passive Risk while Maintaining or Increasing Active Risk

Yes

Detect Statistically Significant Evidence of Security Selection Skill

Yes

Cost
Relatively Low

The Problem with Performance Evaluation

The conventional approach to evaluating past performance does not tell us anything useful about the future.

Performance evaluation is useful only if it can lead to actionable insights.

How ESG Overlays Lead to Unintended Market Bets

ESG constraints can create unintentional systematic exposures within equity portfolios. Once identified and measured, these exposures are easily managed.

Factor Risk Models Designed for Allocators

New passive factor risk models distinguish between performance due to security selection and that due to unintended passively-available market exposures that differ with those of the benchmark, detect security-selection skill likely to persist, and revolutionize risk management.

Manager Selection: The Quixotic Search for Skill

Active skill exists …. but it is challenging to detect reliably and, even when present, decays over time.

We’ve been fortunate in some wonderful clients, including:

Risk Models for Insurance Companies

DFA/ALM Models

Cloud-based, user-friendly, transparent, flexible yet robust, stochastic asset-liability models designed to be easily vetted.

 

DFA Peer Company Risk Analysis

Asset-liability modeling of both client company and individual peer company’s surplus and net income risk postures.      Provides added insight into that most critical investment decision: How much surplus risk can we tolerate?