For those who tend to rarely change their allocation profile, the resulting picture is a static, or pseudo-static, allocation that looks like this.
Chart 1 -- Historical Allocation – Static Portfolio
When the allocation methodology is dynamic, the allocation picture typically looks like the picture below, with portfolio weights changing over time based on the output of the chosen allocation methodology. Dynamic allocation engines are many and include methodologies such as risk parity, minimum variance and mean-variance optimisation (MVO), all of which are supported on the ALPIMA platform, along with many more.
Chart 2 - Historical Allocation – Dynamic Portfolio
With the ALPIMA platform, it is possible to systematically take into account market views into a given portfolio.
We do this using a Black-Litterman approach where the “prior”, i.e. the starting portfolio, can be either a static or a dynamic allocation. The key inputs are market views with their respective probabilities. The “post”, i.e. the resulting portfolio, is a view-adjusted version of the starting portfolio. When the “prior” is static, the resulting allocation looks like this, with the blue bars indicating moments in time when views have been applied.
Chart 3 -- Historical Allocation – View-Adjusted Portfolio
The ability to systematically incorporate views into portfolio allocation offers several benefits:
Interestingly, the process can also be reversed to create a portfolio to view (PTV) analysis. If the adoption of market views shape portfolio allocation in a certain way, conversely, a given portfolio allocation implies certain market views vs a given framework, which can help evaluate if the current portfolio allocation is in line with market convictions.
Contact us if you would like to know more about the fusion of systematic portfolio construction and market views.