Risk Models Built with Passive ETFs as Factors
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.
Offset risk from unintended market exposures with ETFs or better fund combinations.
Avoid closet-indexing the aggregate portfolio.
Identify and offset unintentional systematic risk exposures that can overwhelm skill.
Identify key contributors to idiosyncratic risk.
We’ve been fortunate in some wonderful clients, including:
Equity Risk Models Designed for Asset Owners
We differ from conventional risk models in that all of our factors are available as passive ETFs.
For allocators, this makes all the difference. For the first time, allocators can:
Separate return due to security selection from return due to unintentional passive risk exposures…. and reveal 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 with skill.
Ensure the aggregate portfolio is taking sufficient security-selection risk to justify fees and has no hidden risk exposures.
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.
Together with Beacon Pointe Insurance Consulting Services
- DFA/ALM analysis of client and individual peers and competitors
- Compare surplus, net income, and capital adequacy risk postures with those of peers.
- Consider the impact of changes in asset risk on relative surplus risk positions
- Provides insight into surplus loss tolerance
Portfolio Risk Management
- Equality and Fixed Income Factor Risk Models built to distinguish security selection risk and return from unintended passive market risks and timing
- Identify any unintended systematic risks
- Mitigate unintentional passive risk… Maximize security selection risk
- Ensure sufficient active risk to compensate for active fees
Manager Selection & Oversight
- Qualitative assessments informed by unique Factor Risk Models built for oversight
- Identify statistically significant security selection skill likely to persist. Avoid managers taking too little security selection risk to overcome fees… even with top decile skill
- Red Flag monitoring: Closet indexing, Negative skill, Overcapitalization, Risk exposures conflicting with mandate, Unexplained changes in risk exposures
- Fee negotiation relative to active risk
Actionable Performance Evaluation
- Performance Attribution, Incremental Return due to: Passive Exposures, Timing (changes in passive exposures), and Security Selection
- Assess Probability of Security Selection Skill
- Performance attribution relative to peers
- ESG risk analysis: detect and offset unintentional changes in market risk exposures caused by ESG mandates
Risk Models for Insurance Companies
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?