Strategic Beta is designed to deliver stable returns in a variety of market environments with an assumed Sharpe ratio of 0.6, return target of 7% and volatility target of 12% p.a.
Built to provide stable returns across a variety of different economic environments, Strategic Beta is an actively managed strategy utilizing a risk-based approach to asset allocation and invests in a full range of risk premia. It begins with a balanced allocation to drivers of long-term return, or risk premia, and then is dynamically tilted in accordance to output from our research process. The end result is a risk-managed portfolio that is adaptable to changing market conditions.
Portfolio’s neutral position has its risk allocated equally across four categories:
- Growth (e.g. equity and credit assets)
- Slowdown (e.g. sovereign fixed income assets)
- Inflation (e.g. TIPS and commodity assets)
- Alternative (e.g. lower beta positions such as volatility, style, carry)
Active positions are taken relative to these initial weights based on our long-term views. The tilts are a result of the team purposefully utilizing more (or less) of the risk budget in each of the categories.
Strategic Beta’s investment philosophy is based on three key beliefs. First, we believe we can build better portfolios by decomposing asset classes into risk premia, which are considered the “building blocks” of asset classes. We believe this process leads to better quality research and ultimately more stable portfolio returns.
A second belief is that strategic asset allocation is a key determinant of longer term portfolio returns and hence that portfolios with a diversified and balanced allocation to different risk premia are more likely to generate consistent long-term real returns.
Our third key belief focuses on portfolio construction. We implement asset allocation and portfolio construction decisions in risk space, rather than in capital space, to help ensure that risk is broadly distributed across a portfolio’s investments.
We acknowledge that diversification is blind to asset valuations and may not protect against systemic shocks. Consequently, we incorporate dynamic risk management into our portfolio construction process to create a more stable return profile. The dynamic risk management has two forms:
1. Accounting for valuation dislocations
2. Accounting for systemic shocks
- Portfolio diversifier
- Compared to a 60/40 approach, significantly less growth exposure required to generate an attractive return
- Combines traditional and alternative sources of return
- Stable investment returns
- No single risk factor dominates the portfolio
- Focus on risk management to help navigate changing market environments
- Actively managed to consider valuation dislocations and downside risk events which may reduce the risk of large drawdowns
- Separate Accounts
- Commingled Vehicle