Multi-factor allocation – BNP Paribas Asset Management’s principles for redesigning tactical asset

Multi-asset teams in the asset management industry already have to contend with implementing investment strategy across numerous portfolios whose opportunity sets may vary considerably. The advent of fintech via the development of robo-advisory strategies potentially creates further demand for a capability to industrialise asset allocation advisory for multiple portfolios. An efficient and robust framework to implement investment views in portfolios on an industrial scale is likely to be critical in the future.

In this new white paper, senior members of our multi-asset team and quantitative research group propose a robust framework for an industrialised implementation of asset allocation strategy tailored to meet the requirements of individual portfolios.

The robust framework proposed consists of three steps:

1. A unique unconstrained tactical portfolio is created by relating the conviction in each view to the allocation of risk budget to the assets underlying the view.
2. The tailored portfolios with investor-specific constraints and targets are constructed using robust portfolio optimisation based on implied active returns derived from the unique unconstrained tactical portfolio. The implied returns are derived from reverse optimisation using the same robust approach. Robust optimisation is the core engine for the industrialisation process. It produces portfolios consistent with the views while complying with constraints without requiring human intervention.

• Finally, a factor-based risk model endows the framework with transparency by allowing for the comparison of risk-factor exposures in portfolios with the original views’ exposures.

Read the paper by Tarek Issaoui, Olivier Retiere, Romain Perchet, Francois Soupe and Chenyang Yin

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice.

The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.

Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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