RISK-BASED STRATEGIES FOR TRUE DIVERSIFICATION

• We contrast the performance of risk-based index strategies to asset-based strategies in a multi-asset context.

• Risk-based strategies include indices targeting a Risk Parity portfolio and Min Variance portfolios for GBP investors.

• Risk-based strategies offer differentiated risk-return characteristics for portfolio diversification.

 
What is risk-based multi-asset?
Risk-based strategies are an alternative approach to multi-asset investing.
 
For traditional asset-based strategies, such as a 60/40 equity/bond portfolio, asset weights drive risk characteristics.  For risk-based multi-asset strategies, risk characteristics drive asset weights.
 
How does this compare to factor investing?
Factor-based index strategies typically look at screening single asset class securities for a particular factor.  For example, Minimum Volatility equity index is typically constructed with a single asset class, e.g. equities whose constituents exhibit the lowest volatility characteristics.  By contrast, For multi-asset strategies a Minimum Variance strategy targets the minimum variance multi-asset portfolio.
 
Risk-based multi-asset strategies reflect a portfolio construction approach, rather than a factor screen.  It is the set of rules by which a multi-asset portfolio is optimised.
 
What risk-based multi-asset strategies are available?
We focus on five well researched risk-based multi-asset strategies:

1. Minimum Variance
2. Risk Parity
3. Maximum Deconcentration
4. Maximum Sharpe
5. Maximum Decorrelation

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