While models building on these early simulations can be helpful for managers in creating a robust portfolio, to some managers, these are not the definitive solution to getting the balance of risk right for clients.
For example, Mr Harman says he uses statistical risk measures as aides to guide asset allocation decisions and risk controls, but adds: "While we believe these measures are helpful, they are imperfect and so need to be supplemented with market experience."
This experience can come in the form of implementing an investment process that helps the management teams to "allocate capital to an array of investment classes and adjusting this allocation given changes in the investment environment".
This is the view of Jonathan Webster-Smith, head of the multi-asset team at Brooks Macdonald, who continues: "For example, the process we use combines strategic and tactical approaches to asset allocation with vigorous individual security selection.
"It also involves the integration of qualitative and quantitative risk controls designed to reduce overall portfolio risk through diversification and other methods."
Make-up
So once the basic diversification and risk parameters are put in place, how should it be managed? According to Lukas Daalder, chief investment officer for Robeco, this “all depends on the risk appetite of the investor”.
Most multi-asset offerings sit in a range between these bands:
1) Pretty defensive – 80 per cent bonds, 20 per cent equities.
2) Pretty aggressive – 20 per cent bonds and 80 per cent equities.
Beyond that, Mr Daalder says you are into the leverage and all sorts of exciting investments.
“Once you have determined your risk profile, you basically match the right combination of assets, taking correlation and volatility into account.
“This can be as simple as sticking to pre-determined benchmarks or as elaborate as you want, using tactical asset allocation strategies such as hedging, overlays, pair trading and leverage, and so forth.”
Whatever risk band and style of management is all determined, he concludes, by the risk appetite of the investor.
Adapting the make-up of the fund to best fit the lifestyle of the end investor is therefore fundamental, as James Dowey, chief economist and chief investment officer for Neptune, comments.
“The biggest real-life risk inherent to investment portfolios is they fail to grow over the years.”
This means the funds need to be there to provide for people funding their retirement or other long-term goals.
Mr Dowey gives three main elements on which to focus:
1) Asset classes which have long and reliable track records over history of producing strong inflation-adjusted returns over extended periods of 10 or 20 years; global equities, for example.
2) Active stock selection, which is “highly potent”, he says, over the long term, as the economy changes and some companies thrive and fall.
3) Capital protection during severe market sell-offs, by judiciously dedicating a minority of the portfolio to assets that will appreciate during a sell-off, including simple index put options.
