Asset Allocation

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We construct a bespoke portfolio for you by optimising (ie. minimising) the risk dispersion, subject to the constraints set by our indicators and any constraints set by higher authority, such as the law, current regulation or your board of directors.

Focus on risk & returns will improve

This is a deceptively simple statement. But it contains a deep truth about our approach. We do not build upon expected future returns. Instead we allocate risk away from assets where risk is increating.

The key is that we monitor risk on a daily basis. Using a method allowing us to quickly detect changes in risk, we use an optimisation method to create bespoke portfolios with our Active Risk Allocation®

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Origo … and the others

The traditional way: Return targeting

Based on expectations of future returns
Expectations are most often wrong
Fixed intervals for portfolio rebalancing
Changes in risk/volatility not taken into consideration
Assumes that assets move in stable patterns relative to each other
In times of trend changes, portfolio is only rebalanced as trend estimates are revised

The Origo way:
Volatility targeting

Based on existing volatilities
No guesswork as the volatilities are available
Intervals for rebalancing determined by target volatility
Adjusting to changes in risk
Takes into consideration that correlation patterns change
In times of trend changes, volatility changes force a portfolio rebalancing

A primer on our approach

Origo’s Asset Allocation advice is built on a simple observation: Much of the portfolio theory taught in (business) school is unfit for practical use. Not because it is wrong, but because it is built on assumptions not corresponding to real life situations.

We believe it is necessary to be systematic and pragmatic at the same time. In practical terms this means that we follow the same indicators day out and day in, but we do not expect them to play the same roles all the time.

In particular, we look for changes – short term and long term – in the correlations between the main asset classes.

Our monitoring across markets

We have classified all the 150 or so variables we monitor daily in four broad groups:

Macro- and microeconomic factors

We also refer to this group of factors as “the fundamentals”. These always win in the long run. But while waiting for this to happen, important possibilities may have been lost. So while this group of factors are very important, mostly they give the background.

Risk, volatility and correlation

This group of variables are based on actual day-to-day observations. We consider cross-asset correlations, volatilities and diversification risks. Certain correlation patterns are important indicators of trouble to come. One such pattern is when asset classes that usually have a negative correlation begin to correlate positively. From offering a portfolio diversification they begin to push portfolio risk up.

Market intelligence

This is a headline for all data indicating the ephemeral “market sentiment”. A large number of survey data exist giving indications of the markets’ perception of risk. Some markets, in particular swap markets, as well as short term money markets and forex markets give important real-time indications of the shifting market sentiments

Technical factors

No introduction necessary. Technical factors are valuable but cannot stand alone. They need to be seen in conjunction with other variables. However, when used carefully, they can be used to identify major turning points in both directions.

Our proprietary indicators

Our understanding of the market dynamics needs to be made actionable in order to be useful.

Hence, we have taken the most important of the factors mentioned above and aggregated them into two main indicators, a market risk indicator and a portfolio risk allocation indicator.

Origo Market Risk Indicator (OMRI®)

Our market risk indicator combines some fundamental factors, some volatility and correlation element as some sentiment data to give an indication of the current risk situation.

Origo Portfolio Risk Allocator (OPRA®)

A strong asset allocation is the basis for any satisfactory long-term return. Asset allocation is always built on a diversified portfolio where the correlations between assets change over time. We have found it very useful to group asset classes in “risk assets” and “non-risk assets” instead of “stocks and bonds”.

Our portfolio risk allocator (OPRA) summarises the max recommended holding of risk assets in a diversified portfolio – based on any “strategic” limitations a given investor has to consider.

An institutional investor may e.g. hold between 25 and 75% in risk assets. So when our OPRA says 30%, this investor should hold 25% in risk assets plus 30% of the difference between min and max allocation. This client should hold 25% + 15% equals 40% in risk assets – in the lower end of the permitted range.

Want to learn more?

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