Invesco puts risk first in handling possible economic scenarios

Sergio Trezzi and Miguel Rona, Invesco’s European co-heads of wholesale business, explain that it is not enough to make static allocations by asset class.

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.

This is the view of Invesco and its European co-heads of ­wholesale business Sergio Trezzi, based in Milan, and Miguel Rona, based in Madrid. They say investors need, and increasingly request, a product that can perform in various macro ­climates and market conditions.

This theory underlies Invesco’s Balanced-Risk Allocation Fund. It is important not least because economists are sharply divided over what the economic climate will be (inflationary growth, deflationary growth or recession, or periods of each).

So, ‘be prepared for all possibilities’, counsels Invesco. Investors seem to be listening to the advice: in the US, the strategy has recently taken in subscriptions of about $50m each day. It has run there since September 2008.

“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 fund’s US-based team says: “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 such times, when outcomes are quite ­uncertain, we believe that such a strategy has a better chance of navigating ­successfully than many others.”

Invesco begins with an equal risk allocation to each of the three ­scenarios before incorporating a degree of active positioning where it assesses the tactical appeal of each asset relative to cash.

The resulting positions affect the level of risk and the allocation of risk for the whole portfolio.

The team adds: “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 placed through a systematic process that considers valuation, the economic environment and investor positioning. There is no subjective override of the models’ output.”

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