Invesco puts risk first to handle possible economic scenarios

New approaches to multi-asset allocation are required in today’s volatile markets, where the contribution to portfolio risk from different asset classes can vary, and fluctuate, wildly from day to day.

A new method is also needed, says Invesco, because economists are divided over what the economic climate will be – inflationary growth, deflationary growth or recession, or periods of each.

It therefore makes sense for clients to be prepared for all possibilities.


Invesco’s European co-heads of wholesale business Sergio Trezzi (pictured above) and Miguel Rona (pictured below) say investors need, and increasingly request, a product that can perform in various macro climates, and market conditions. This underlies Invesco’s Balanced-Risk Allocation Fund.


“People want something that works more or less in different market scenarios, not getting a bad result when markets go badly, or good results when they go well,” says Rona.

The team behind the fund adds: “Part of what we try to accomplish with the strategy is to ‚win by not losing.‘ If investors can avoid painful losses, they stand a much better chance of having attractive compound returns even with moderate gains. We do this by balancing the amount of risk associated with three economic environments:non-inflationary growth, recession, and inflationary growth. In times like this, when outcomes are quite uncertain, we believe that such a strategy has a better chance of navigating successfully than many others.

“We begin with an equal risk allocation to each of the three scenarios. From there, we incorporate a degree of active positioning where we assess the tactical appeal of each asset relative to cash. The resulting positions affect both the level of risk and the allocation of risk for the total portfolio.

“We constrain the tactical weights so that there are no short positions, no asset class risk contributions above 50% or below 16%, and total tactical risk is no more than 2%. The active positioning component is implemented through a systematic process that considers valuation, the economic environment and investor positioning. There is no subjective override of the models’ output.”

Investors in the past may have believed they have diversified exposure and reduced internal correlation simply by being invested in many asset classes – maybe calibrated by their return expectations.

But Trezzi says many people who bought multi-asset or ‘defensive balanced’ funds, both relatively popular categories, “are not happy with the result coming from the traditional products, because they have underestimated the contribution of risk they are intrinsically given. Consequences are more important than probabilities.”

In stressed markets historic non-correlation tends to break down; ‘safe havens’ – indebted nations’ loans for example – can become risky; and certain assets’ riskiness may jump, or fall, significantly.

Invesco’s launched its strategy designed to tackle this, in Europe in September 2009. But it has run, under Invesco’s team of eight investment professionals in Atlanta, since September 2008. There recently it has been taking in about $50m a day. The US mutual fund holds approximately $3bn in the US. Overall risk-parity-strategy assets are about $4.3bn.


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