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Jan Straatman, chief investment officer, Lombard Odier Investment Managers

FundForum 2012: Asset allocators need to understand investors' pain threshold

Does the asset allocation process need fixing? That’s a question being considered by many investment managers, like Jan Straatman (pictured), chief investment officer of Lombard Odier Investment Managers.

Speaking at a panel session chaired by Clara Dunne, chief executive at Caceis Investor Services in Dublin and Amin Rajan, chief executive of Create Research, Straatman observed that the information that gets fed in to generate risk-neutral optimum portfolios often aren’t risk-neutral at all.
“We’ve all learned that asset allocation takes up to 90 per cent of your risk budget, but with distributions getting wider and correlation increasing, we’re looking to innovate in the asset allocation process.
“We want to make it more bespoke and attuned to our investors’ risk/return targets.” The objective, he says, is to create more stable distributions and manage drawdown risk better.
But the process is not an exact science, noted Aberdeen Asset Management CIO Anne Richards. “Fifteen years ago asset allocation was about seeking returns,” she said. “Now it’s all about risk, but we don’t understand exactly what risk is. We need to assess what risk is before creating portfolios.”
Eurizon Capital’s response to the dilemma is dynamic hedging. According to head of global strategies and total return Claudio Foschi, diversification is the best long-term hedge for asset allocators, but in the short term high-frequency trading is making things harder.
“The next challenge is how to hedge our portfolios effectively,” said Foschi: “First, expand the investable universe; secondly, focus on risk allocation rather than asset allocation; thirdly, hedge more dynamically using futures and options.”
Eurizon is implementing fixed-maturity products to create “better affinity with clients’ investment horizons and their risk profiles”.
Brian Fleming, head of multi-asset risk and structuring at Standard Life Investments, said: “With fixed maturities, clients have to understand the journey involved. There can be huge drawdowns along the way. Allocators must clearly set out the objectives and engage closely with the client to provide reassurance when the portfolio is falling.”
Straatman agreed, saying: “This is about understanding the maximum pain threshold for each client, and making sure the investor understands whether this strategy fits exactly what they want.”

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