Post on 27-Dec-2015
Asset Management – Current Trends and Challenges
Mladen LatkovićRisk Manager
Raiffeisen Mandatory Pension Fund Mgmt Co.
Croatian Quants DayDepartment of Mathematics, Faculty of Science, Zagreb,
22 February 2008
Summary
• Pension funds investment goals
• Applying MVO in practice
• Black-Litterman model
• Global diversification
• New investment styles and products
Pension funds investment goals• Croatian pension system:
– 1st pillar: Pay-As-You-Go (defined benefit)– 2nd pillar:
• pension funds (defined contribution) – accumulation phase• pension insurance company – retirement phase
• Mandatory pension funds:– long-term savings vehicles (bear investment risk)– AuM (as of Dec/07): € 2.9 bn
• Investment goals:– positive real return (long term)– towards absolute return strategy (avoid drawdowns)
Modern Portfolio Theory in practice
• Markowitz MVO:– unknown values of asset returns and covariances
• estimation risk – MVO is “error maximizer”– diversification diminishes with increasing risk
tolerance– instability to small changes in parameters
• possible solutions:– resampling procedure (Michaud, 1998)– robust optimization (El Ghaoui & Lebret, 1997; Ben-
Tal & Nemirovski, 1998)
Constrained MVO• constraints reduce estimation risk:
– simple constraints (min/max exposure, cardinality constraints)– Equivalent Number of Assets (Bouchaud et al., 1997; Rouvinez
2003):
i iw2
1ENA
Black-Litterman model• provides mechanism for calculating an implied
expected returns of assets• optimal portfolio should be close to the market• Bayesian approach:
market equilibrium returns
+investors subjective views on expected returns of a
(sub)portfolio (with given level of confidence)
mixed estimate of expected returns
BL extensions
• multi-factor models, recession risk (Krishnan & Mains, 2005)
• non-normal markets (Giacometti et al., 2005; Meucii, 2006)
• hedge funds (Martellini & Ziemann, 2008)
Global diversification• Asset classes (traditional view):
– equity– fixed income– real estate– commodities– private equity– hedge funds
• Multi-asset funds examples – university endowment funds– double digit returns, low risk, moderate drawdowns– stable allocations
New investment styles and products• financial innovation• exposure to alternative betas – different risk premiums
than traditional (equity, interest rates, credit)– style factors in equity markets (e.g., small cap vs. large cap)– volatility, liquidity, spread
• new products:– structured products (capital guaranteed, structured risk profile)– hybrid securities
• commoditisation of hedge fund type strategies• UCITS III directive
– expanding universe of appropriate investments– derivatives not just for hedging
• hedge funds replicators• 130/30 strategy (130 long, 30 short)
Thank you!
Mladen LatkovićRisk ManagerRaiffeisen Mandatory Pension Fund Management CompanyMagazinska 69, ZagrebE-mail: mladen.latkovic@rmf.hrPhone: +385-1-6003-938Web: www.rmf.hr