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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.

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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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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.

SAMPLE FUND ANALYSIS

Comparisons with Conventional Analytics

Risk and Skill Analytics

Type
Brinson / Active Share
Measure Current Risk
Attempted
Robust
No
Validation
Easily Disproven
Quantify all Current Drivers of Future Performance
No
Investable Factors
No
Distinguish Active Risk from Passive Risk
Attempted
Offset Unintended Risk Exposures
No
Minimize Unintentional Passive Risk and Maintain or Increase Active Risk
No
Detect Statistically Significant Evidence of Security Selection Skill
No
Intuitive
Yes
Cost
Low

Conventional Barra-Type Factor Models

Type
Factor Risk Models
Measure Current Risk
Yes
Robust
Yes
Validation
Can be Proven
Quantify all Current Drivers of Future Performance
Yes (but less meaningful)
Investable Factors
No
Distinguish Active Risk from Passive Risk
No
Offset Unintended Risk Exposures
No
Minimize Unintentional Passive Risk and Maintain or Increase Active Risk
No
Detect Statistically Significant Evidence of Security Selection Skill
No
Intuitive
No
Cost
High

Peer Analytics Passive-Factor Risk Models

Type
Factor Risk Models
Measure Current Risk
Yes
Robust
Yes
Validation
Easily Proven
Quantify all Current Drivers of Future Performance
Yes
Investable Factors
Yes
Distinguish Active Risk from Passive Risk
Yes
Offset Unintended Risk Exposures
Yes
Minimize Unintentional Passive Risk and Maintain or Increase Active Risk
Yes
Detect Statistically Significant Evidence of Security Selection Skill
Yes
Intuitive
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.

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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.
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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.
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Manager Selection: The Quixotic Search for Skill

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

 

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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?
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