Under our proprietary Risk Regime Investing (RRI) approach, we structure portfolios dynamically. We measure the fragility of the capital markets on an ongoing basis. As soon as we detect a greater concentration of risk in the markets, we reduce the allocation to riskier real assets (equities, commodities and real estate) in the portfolios and place the latter in protection mode. Conversely, we increase the allocation to real assets when the markets are calm. RRI strategies are basically implemented through passively indexed instruments, primarily through physically replicated ETFs.
Conditions can vary: they can be volatile or calm, fragile or resistant. In today’s complex market environment, the following factors are therefore particularly important when it comes to asset management:
- The awareness of current market conditions.
- The ability to read the changing states of markets.
- The experience to structure a crisis-resistant portfolio based on empirical and scientific findings.
Risk Regime Investing addresses these three factors and positions the portfolio to suit the current market climate.In figurative terms, this means dressing appropriately for the current weather conditions, rather than spending the whole year wearing an all-weather coat that is too thin for winter yet too thick for summer.
Over time, asset classes do not behave steadily or according to clearly defined rules. Our dynamic and forward-looking perspective makes allowance for the fact that the risk climate can change at any time. That is why risk is our top priority and why we use it as a tool for identifying opportunities. In contrast, static perspectives usually focus exclusively on the past and present, meaning they react to losses only after they have happened.
Financial markets are mostly micro-efficient and macro-inefficient
Our RRI approach focuses on the asset class level, and by excluding stock risks, is better able to forecast returns and control risk. We respect the high degree of market efficiency and therefore implement our strategies passively at the micro-level.
Our risk management approach and underlying proprietary risk indicators reflect the fragility of the market and the likelihood of severe market correction. The forward-looking risk management approach therefore offers an effective early-warning signal to identify increased market risks.
Implementation – active/passive
PARSUMO Capital’s RRI approach is based on a wide range of empirical findings. It involves consistently selecting the most effective and demonstrably promising approaches across all levels of the investment process.
Tactical asset allocation – active
In addition to a defensive approach to defining strategies, the risk indicators are considered in order to ensure that the required target risk is scaled across the key tactical asset allocation levels. According to a wide range of scientific analyses, these decision levels play the most important role in determining the performance and – even more importantly – the effectiveness of a broadly diversified portfolio when it comes to risk. PARSUMO Capital therefore places great emphasis on these tactical asset allocation levels and deliberately applies an active approach to their management.
Stock selection – passive
At stock selection level, achieving a sustainable outperformance in the large and efficient main markets can be extremely difficult and requires substantial capital. PARSUMO Capital therefore manages this level of the RRI investment process through passive or indexed investing.
When we structure our portfolios, we primarily use physically replicated exchange-traded funds (ETFs) from renowned providers. ETFs offer crucial advantages when it comes to the active management of broadly diversified portfolios and are a key requirement for the implementation of PARSUMO Capital’s professional risk management approach:
- Performance: ETFs exactly replicate indices. This requires experience and intelligent, precision work. The performance of an ETF is determined on the basis of how closely it replicates a given index. The lower the tracking error, the better the work of the ETF providers.
- Cost-effectiveness: ETFs are exchange-listed index funds, which passively replicate their benchmark index by means of a precise replication process. This makes it possible to invest in the selected market irrespective of the investment decisions taken by individual fund managers. This passive approach also allows management costs to be kept to a minimum.
- No issuer risk: ETF assets are legally segregated from those of the issuer. This means there is no issuer risk when investing in ETFs.
- High liquidity: Given the small difference between the purchase and sale prices, ETFs usually have an important advantage when it comes to liquidity.
- Flexible and cost-effective trading: ETFs can be bought and sold flexibly. Prices are continuously updated. An ETF allows investors to buy or sell an entire basket of securities in just one transaction, which means that trading is efficient and cost-effective.
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