Portfolio management is one of the most lucrative business activities for traditional financial services firms. In a recent report, BCG mapped the services offered by financial institutions in terms of their attractiveness and fit for “digital transformation.” They found portfolio management to be among three most important candidates for digital disruption.
However, portfolio management is also heavily reliant on human expertise, making it among the costliest areas of business. This is why technological innovation in portfolio management is in high demand.
Leveraging the versatility and reliability of the I-System, we can offer a very wide variety of quality, sustainable portfolio solutions without the need for the costly human expertise. The sections below describe four examples of competitive investment product we can propose in partnership with regulated investment management organizations:
- Dynamic Portfolio Allocation – an enhancement of the now obsolete “60/40” portfolio allocation model (i.e. allocating 60% of a portfolio to stocks and 40% to bonds)
- Tail-Risk Portfolio – effective down-side protection in the event of collapse of equity and/or bonds prices
- Inflation Hedging – a commodity-futures based portfolio aiming to deliver positive real returns in the event of an acceleration of inflation
- Momentum Investing – this variant of trend following, based on stock market investing, has proven among the most effective investment strategies over the long term.
Ever since Walter Morgan created the balanced fund in 1929, the “60/40” model has been the dominant approach to portfolio allocation. However, this may be about to change: in the wake of the longest equities bull market and a nearly 40-year trend of falling interest rates, the 60/40 may have reached its limits.
With many stocks trading at historically high multiples and yields near all-time lows, even a modest rise in interest rates could result in negative returns. These conditions led many analysts to sound alarm about the risks of traditional 60/40 approach.
The emerging view, expressed in a recent Bank of America report is that, “The future of asset allocation may look radically different from the recent past, and it is time to start planning for what comes after the end of 60/40.” Indeed, effective asset allocation will require nimbler, more tactical approaches backed with high quality decision support technologies.
The objective of tail-risk investing is to protect investment portfolios from highly adverse events in capital markets, like a major stock-market crash or a sustained bear market.
Solutions including active hedging of equity and/or treasury exposure as well as exposure to major trends in key commodity markets like precious metals, energy, agricultural commodities or even crypto-currencies.
Inflation is the single greatest macroeconomic risk facing investors. Since 1960, more than two thirds of the world’s market economies experienced episodes of high inflation. On average, investors lost 53% of purchasing power during such episodes. In many cases losses of wealth were significantly higher. Empirical evidence has shown that exposure to commodity futures represents far and away the best hedge against inflation.
Using the I-System we can also develop Momentum Strategy portfolios. Momentum strategy is a variant of trend following and has proven remarkably effective for over a century. It entails buying best-performing stocks and can also include short-selling the worst-performing ones.