WHAT WE DO
OUR CORE BELIEFS
Returns matter, but behaviour matters more.
Price drives long-term returns
Asset allocation is the most effective tool for managing risk
Asset class risks are driven by their underlying risk factors
Diversify by underlying risk factor, not asset class
Diversify when it makes sense, not merely for the sake of it
Build robust rather than optimal portfolios
The core of our risk management process is understanding that there are inter-dependencies across the various drivers of portfolio risk. We therefore separate asset classes into the main drivers of the variability in their returns (we call these risk factors) and then construct our portfolios based on these risk factors.
In times of uncertainty, particularly when the different microstructures of markets are behaving in erratic and seemingly unrelated ways, we want our portfolios to be resilient and navigate periods of stress as unaffected as possible.
Diversification is one element of a robust construction process, one which becomes particularly important as markets experience periods of volatility, akin to the seatbelt in an out of control car – something which may not feel needed when things are calm, but is life-saving when emergency hits.
Focusing on diversifying by risk factor and not simply by asset class, allows us to construct portfolios that are better diversified and more robust in times of market uncertainty.
An overview of our portfolio construction process is shown below:
LONG TERM FORECASTS
SPECIFIC RISK CONSTRAINTS
ROBUST OVER OPTIMAL PORTFOLIOS
SHORTER TERM RISK FORECASTS
We incorporate our forecast distribution of returns to control for potential low probability/high impact events (left tail risk)
COMMON SENSE OVERLAY
At Innova we are investment vehicle agnostic, which means we have no bias toward managed funds over ETFs or active investments over passive, instead we focus on finding the investment that gives us access to each risk factor most effectively. This is a predominately quantitative process which involves ranking managers based on our internal scoring criteria. We then use our judgement and experience to eliminate any potential high-risk investments from this ranking.
To download a summary of our investment selection process please click here