As a risk manager, PARSUMO Capital focuses on assessing capital market risks and not on forecasting returns that are very uncertain. Our experience shows that, in the long run, sustainable returns are more likely to come from diligent risk assessment than from forecasting returns.
Successful risk management assesses future risks and considers them in the context of the attainable returns. Experience shows that it is not just a matter of favorable and unfavorable risks; there are times when it is worth assuming risk – and times when it is not.
With both of PARSUMO Capital’s approaches, the market conditions and the risks are assessed quantitatively and each investment decision is based on facts.
Prospective risk management for overall portfolio
PARSUMO Capital applies a risk management approach that identifies various market phases – risk regimes – and the associated attractiveness of the prevailing risk conditions. In periods where risk is low and the prospects for attractive returns are good, PARSUMO Capital increases the risk budget for the portfolios. At times when risk is not rewarded, this budget is drastically reduced.
PARSUMO Capital’s Risk Regime Investing approach differentiates between six market regimes with various characteristics relating to risk, expected return and correlation. PARSUMO Capital uses these regimes to derive various risk budgets as target values, resulting in six different portfolio structures. These portfolios are ideally constructed to suit market conditions in the immediate future. This is more likely to yield above-average returns in each of the divergent market and risk regimes.
How does PARSUMO Capital distinguish between these market conditions? And which risk indicators are used to differentiate between the various market regimes? The Systemic Risk Index and Turbulence Index are our two main indicators. We also draw on several other behavioral finance indicators. When combined, these provide us with a reliable prospective view of market conditions.
Controlled risk management for equity portfolios
PARSUMO Capital differentiates between efficient and inefficient markets. Profitable stock selection is only possible in inefficient markets. Comprehensive analyses show that stock markets in the US and Japan are efficient. By contrast, stock markets in Europe, Switzerland and the emerging markets are inefficient. Small and mid caps and stocks with high dividends can basically also be described as inefficient market segments. PARSUMO Capital only actively manages the part of the portfolio with stocks from inefficient markets.
Rules prevent emotional or arbitrary decisions
Traditional active investment approaches are based on multi-factor models. However, all too often these factors are not applied consistently. Decision-makers are likely to react emotionally and arbitrarily to stress and temporarily abandon their model. Individual factors can also be excluded at will and other factors included to fit the line of argument. This approach often leads to inconsistent results.
The Quantitative Stock Selection (QSS) approach is applied strictly according to a set of rules – including at times of high market stress. PARSUMO Capital is convinced that discipline is a crucial factor for investment success.
Target selected risks – but no residual risks
For active management of equity portfolios, how the relative performance is generated is crucial. It stems from the deviation of the risks taken from the benchmark. This deviation often reflects the different risks taken, such as:
- country risks
- sector risks
- currency risks
- stock selection
Under the QSS approach, the risk budget is only consistently used where the model can generate added value: for stock selection. Other risks (country, sector and currency risks) are given a neutral weighting relative to the benchmark, so that the tracking error can only stem from the stock selection. This approach enables focused and conscious assumption of risk where there is a high probability that value can be added.
Based on this, the QSS approach delivers a better performance than smart beta strategies and traditional active stock-picking.
