Asset allocation is a fundamental element of our individual and balanced portfolio management. This is important to create long-term and solid excess returns and also to reduce the risk of loss during turbulent times.
At the strategic level, a long-term investment strategy is formulated (1-5 years). A long-term allocation is made among the selected asset classes, and an investment benchmark is chosen. At the strategic level, our starting point is sophisticated mathematical algorithms supplemented with our insight and experience.
At the tactical level, the investment horizon is most often less than one year. The basis for tactical asset allocation is our understanding of the current economic climate coupled with insight into the development of different asset classes across the economic cycle.
The CLI model is used to understand and assess the economic climate. Using the CLI model, economic trends are divided into four phases:
The financial returns fluctuate with the economic seasons, and the CLI model provides an understanding of economic trends which forms the basis for defining the tactical allocation.
Risk analysis is key in ensuring that portfolio managers and investors have the skills required for making a given investment. For some time, Nykredit Asset Management has studied and applied risk management and risk modelling as a separate discipline.
In general, asset management used to be about offering investors the highest possible returns relative to a given risk profile. In recent years, however, the financial sector has learned that measuring risk is one thing, but understanding risk ratios and not least reacting in time is a totally different ball game.
Risk analysis is key in ensuring that portfolio managers and investors have the skills required for making a given investment.
Obviously, we focus on return potential, but we also consider the risk factors affecting returns. The message is the same, but we look at both sides of the coin, so to speak, as return potential must never go without a risk assessment.
Like other investment managers, we can forecast the return on a portfolio on a 5-year investment horizon at a 90% probability. But we are also able to forecast the minimum loss in any one month for the coming 40 months, which we find is a fairer approach.