Investment Consulting

Executive summary

Investment Consulting

The Investment Consulting service is oriented towards professional institutional investors: mutual funds, hedge funds, asset managers, pension plans, endowments, depositary institutions, private banks, family offices, insurance companies (life, property, casualty and health) and treasury departments of corporations, municipalities and government agencies. It delivers performance improvements in the areas of investment policy, asset allocation (strategic and tactical), securities selection and activity (shift to more active strategies)

Recent advances in finance, information technology and data management have transformed the investment management process and lead to the proliferation of investment strategies, styles, instruments, electronic front-to-back platforms, and more international diversification, and global investments. The current zero interest rate environment is characterized by decreasing fixed income returns and factor premiums, increased uncertainty (volatility of volatility), where many traditional passive and index strategies are generating low or even negative returns. In this environment, our service helps institutional investors with cross-functional engagements in the areas of: (1) asset allocations and securities selection processes to improve diversification, returns and their consistencies – to identify, explore and select opportunities in traditional (fixed income, equities, derivatives) and alternative investments (hedge funds, liquid alternatives, derivatives, real estate) in both developed – US, EU (Core and Peripheries), and selected emerging markets – Central and Eastern Europe, Russia, LatAm and GCC; (2) technological and methodological improvements by enhancing data-processing, electronic trading and portfolio management processes to reflect strategic multi-asset views and improving the abilities to express these views efficiently (e.g., designing factor investing strategies with positive cross-asset carry); and (3) automated portfolio factor analysis and risk management solutions are also offered.

Our service focuses on factor-based portfolio construction and insurance to reflect bespoke investment strategies (passive, active, alternative, and liquidity solutions) with exposures to specific investment factors as well as tail-risk hedging strategies. Factor exposure can be obtained and managed efficiently with ETFs, notes, certificates, warrants or derivatives. It entails portfolio management improvement – optimizing the usage of datasets, performance attribution, developing and managing exposure to risk factors, optimizing the usage of enterprise datasets. We also help in creating, backtesting and optimizing bespoke investment strategies, focusing on multi-asset solutions and usage of derivative overlays for both active and passive portfolio management. In the passive space, the low costs, transparency and consistency of index investing are enhanced by moving from traditional market-capitalization based weighting to smart and alternative beta strategies and portable alpha strategies. We help with analysis and implementation of new equity and fixed income smart beta strategies, enhancing return and decreasing the risk of indexed portfolios.

For life insurance companies and pension funds distributing retirement savings products, the Investment Consulting service helps with the design and development of new products (selection of index benchmarks, term sheets), and improvements of marketing and distribution processes. We also consult our clients on hedging strategies and solutions for mainstream products for both defined contribution and defined benefits schemes such as variable annuities, index annuities, indexed universal life and target date funds in the US market as well as unit-linked life insurance products in the EU.

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Service Methodology

Our Investment Consulting service entails quantitative, structuring and risk advisory for portfolio management and investment strategies (single asset or multi-asset). We develop and implement quantitative model/product libraries for evaluation of assets in the portfolios and the derivatives overlays using standard software packages – Matlab, VBA, Bloomberg, Numerix. Investment strategies are also evaluated and tested with these packages, but occasionally the MetaQuotes Language 4 is used. We provide quantitative advisory with software systems of vendors such as Murex, Calypso and BISAM. We help on measuring and evaluating performance and on risk measurement. Solutions on managing the risk profile by using delta one, leverage or protection overlays are also provided. The execution of strategies with futures and options depends on the clients’ access to organized exchanges and their clearing services.

The Investment Consulting service offers cutting-edge technologies and methodologies for exposure management, breaking down exposure of a portfolio to systematic factors and idiosyncratic components. It introduces sophisticated Monte Carlo-based economic scenario generation hybrid cross-asset framework based on factor analysis and featuring co-dependence of risk factors and tail-risk. This allows for overlays and for expressing optimally specific views by using liquid alternative investments, derivatives, indices, trading strategy indices, ETFs, Delta-one certificates and funds. It includes creation, back-testing and optimization of multi-asset investment strategies and tail-risk hedging solutions. The investment management process is enhanced by extensive use of derivatives as stand-alone strategies or overlays to existing portfolios. Having a clear view on performance attribution allows for reducing (eliminating) undesirable exposures. Capital protection overlays are implemented by using specific rules and the models can be integrated with clients existing IT infrastructure.

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Service Options

Companies can elect whether they just require Appleton Greene for advice and support with the Bronze Client Service, for research and performance analysis with the Silver Client Service, for facilitating departmental workshops with the Gold Client Service, or for complete process planning, development, implementation, management and review, with the Platinum Client Service. Ultimately, there is a service to suit every situation and every budget and clients can elect to either upgrade or downgrade from one service to another as and when required, providing complete flexibility in order to ensure that the right level of support is available over a sustainable period of time, enabling the organization to compensate for any prescriptive or emergent changes relating to: Customer Service; E-business; Finance; Globalization; Human Resources; Information Technology; Legal; Management; Marketing; or Production.

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Service Mission

The primary mission of the Investment Consulting service is to produce efficient investment portfolios by aligning investments with institutional investor’s business strategy in order to fulfil the corporate vision for optimum success. This mission is accomplished through collaborative efforts of the investment consultant (Dr. Valchev) and client personnel (portfolio, investment and risk managers, fundamental researchers, technologists and traders). Core emphasis is placed on realizing enterprise benefits through investment management alignment and integration within the broader enterprise business strategy (expanding the investment portfolios to include exposure to new investment opportunities – investments in new geographies, new instrument classes and strategies, all done in an efficient and transparent way). Potential benefits include (but are not limited to) business value, returns on investments and assets (ROI, ROA), improved risk management, total cost of ownership (TCO), top and bottom line financial results, change management, investment management process improvement, customer, investor and employee satisfaction (CSAT, ESAT) and retention.

The vision of the Investment Consulting service is to see clients improving risk and return, attracting more capital and leveraging technology investments for maximum business value returns through optimum service performance. Specifically, our aim is to improve the investment process, by expanding the investment universe and delivering exposure to the desired risk factors in a direct way and enhancing returns. It offers increasing transparency and clear view on return attribution, improving the abilities to express optimally specific investment views and optimizing the risk-management process. The Investment Consulting service allows for implementing portfolio insurance at times of market uncertainties, thus, reducing volatilities of portfolio returns. This insurance can be overlaid against an existing portfolio or a new portfolio can be constructed which may have embedded insurance. One end result is improved monitoring and managing the exposures to risk factors.

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Service objectives

The following list represents the Key Service Objectives (KSO) for the Appleton Greene Investment Consulting service.

1. Investment Strategies
   The primary objective is to expand the set of investment opportunities by introducing additional trading strategies with attractive risk/reward profiles. In many cases, investment managers are interested in trades with low or negative correlation to existing portfolios and we can propose such trades, some of which can be expressed directly with derivative products or alternative investments. On the quantitative investment strategies side, we offer a variety of stand-alone trading strategies supported by statistical analysis. The portfolio return is enhanced by monetizing such items as factor premiums, dividends, coupons and option premiums. Example strategies are equity short/long – relative-value, dispersion, correlation, enhanced equity; currencies – carry, value and momentum; commodities – carry, momentum, seasonalities, curve, roll-down and volatility; fixed income – directional (corporate – investment grade, subordinated, high-yield, emerging markets sovereign and corporate) and relative-value, curve, convexity, roll-down, carry (single and cross-asset), credit and capital structure arbitrage (convertibles, covered bonds, COCOs); derivatives – relative-value, curve trades, volatility, smile/skew and correlation, interest rate cap/swaption arbitrage; asset allocation strategies. What is unique in our proposition is that the risk and rewards of these strategies can be analyzed quantitatively with our hybrid cross-asset Monte Carlo methodology both stand-alone and at portfolio level. In relation to investments and portfolio analytics, we help with asset allocation, portfolio optimization, portfolio risk analysis, overlays, hedging tactical and strategic asset allocation, scenario testing. Some examples of investment structured products that are used for complex trading strategies are Cap Calls, Cap Puts, Digitals, Multi-Asset Range Accruals, Multi-Callable Range Accrual Notes, Accumulators/Deccumulators, TARF, Shark-Notes, Equity Booster Swaps, Synthetic Convertibles, Reverse Convertible Baskets (with trigger barriers). On securities selection side, we can help investment managers to expand their investment universes by adding exposures to investment opportunities in developed – US, EU Core, Peripheries and selected emerging markets – CEE, SEE, Russia, LatAm and GCC. The Investment Consulting service provides advise generally on the markets, sectors, securities and strategies, alternative investments and also on the management and optimization of existing portfolios in these markets.
2. Factor Exposures
   Our Investment Consulting services start with performance attribution analysis of an existing client portfolio with the main objective of improving investment performance, which is done primarily by exiting some inefficient allocations and executing additional trades to deliver desired exposures to set of investment factors with attractive risk premiums. These factors are broad, persistent drivers of asset returns and could be sub-classified as macro, sector, country and style factors. Identification of factor exposures for a portfolio is based on factor and attribution analysis and we perform also what-if analysis to assess the effects of adding new positions. For instance, for index funds, we consult on smart beta constructions that replicate systematic exposure of the index by using asset with lower volatilities and thus improving return versus risk tradeoff. Obtaining the desired factor exposures can be achieved swiftly and efficiently by executing deals in liquid alternatives and derivatives. This factor investing approach is suitable for investment managers with both asset allocation style and securities selection style. In addition, we offer bespoke portfolio construction containing directly the desired exposure levels to the preferred set of risk factors, which is usually realized by using liquid alternatives (e.g. ETFs, trading strategy indices, delta-one certificates), derivatives and structured products. A second investment objective is increasing diversification, which is achieved by adding new assets, and thus controlling the factor exposures, but sometimes is it more directly and efficiently realized by using derivatives overlay. Derivatives overlays allow fund of fund managers for adding or reducing exposures to factors (e.g., sectors, styles and markets), by combining investments in funds with investments in derivatives. These overlay solutions can be on existing or new funds or on instruments from the existing or other asset classes such as interest rates, equity indices, currencies, inflation, commodities, credit default swaps. Third, we use factor models also for asset and liability management (ALM) and liquidity management at balance-sheet level.
3. Enhancing Returns
   The Investment Consulting service provides return-generating investment ideas in developed and selected emerging markets in the traditional asset classes, specific to the return drivers for each asset class. This is based on our expertise in fundamental, technical and quantitative research (strategies). Proposed quantitative trading strategies are applicable for both developed (US, EU Core, Peripheries) and emerging markets, where we have substantial experience in the regions of CEE, SEE, Russia, LatAm and GCC and can advise on portfolio construction in the traditional asset classes and on available alternatives, overlays and hedges. The desired risk/rewards profile is achieved also by smart beta and portable alpha strategies, which are well suited for indexed and passive funds. The strategies are with various degrees of risks and can be combined to an existing investment portfolio or can be executed stand-alone. The objective is to enhance returns by using synthetic constructions which so far, because of their technical complexities, have been out of reach. We advise on strategies with derivative overlays, which can be used for managing slippage – portfolio inefficiencies that lead to lower return or bigger risk. They can be used also to reduce large exposure to systematic factors, which does not add much value to the fund’s performance. Alternatively, overlays can be used to add synthetic beta exposure to high portable alpha applications such as alternative asset investments and investments in real estate by, e.g., entering in index futures contracts, call options on index futures or enhanced indexing. Derivative overlays can be used to combine multiple hedge fund strategies in an integrated package.
4. Risk Management
   One of the main objectives of our service is reducing financial risk by advising on portfolio insurance solutions, which can minimize volatilities of portfolio returns. This is achieved by adding positions with low or negative correlations to the existing portfolios. In this way, it is possible to offset market, equity, interest rate, credit spread and swap spread risks. This portfolio insurance works well in periods of market uncertainties when the preservation of capital is paramount. It is important to note that for exact risk quantification, an automated risk measurement and management platform is necessary and we can assess the cost and benefits of a risk platform and can advise on its design and architecture. In the insurance space, for retirement savings plans annuity businesses, we can consult on specific protection overlays, which can be activated. We help with the development and implementation of risk governance policies, risk and concentration limits for investment in specific asset classes, issues, sectors, geographies and countries. On market risk side, we help with implementation of VaR, ETL measurement, limits, sensitivities calculations (Delta, DV01, duration, CS01 and OAS sensitivities are very important in investment management) and design and implementation of hedging policies. For private banks, we help with balance-sheet management of portfolios of retail structured products by hedging portfolio sensitivities to the risk factors. Our approach is based on advanced statistical and econometric models. For insurance companies, we advise on implementing simulation engines to math assets and liabilities and satisfy regulatory under Solvency II. For depositary institution, we offer risk and regulatory advisory, which includes Basel II and Basel III frameworks and implementation (PFE, EE, EPE, LGD, IRC, DRC, Economic Capital, CRD IV), CCAR. For credit risk measuring, monitoring and hedging, we advise on PFE, CVA, DVA, BCVA, FVA and cVaR . We help with implementing the IFRS9 framework for reporting. We do stress-testing of our VaR models in order to identify situations that could create both extraordinary and plausible losses, following examples of previously defined scenarios which meet regulatory requirements. The requirements for the market risk stress testing are a set of simple parallel and inverting/steepening scenarios (in additional set of more complex scenarios can be required, these will be the combination of historical scenarios and complex term structure shifts; or configuration a contingent loss matrix, where the maximum loss under a fixed set of scenarios will be limited).
5. Technology Change
   This objective aims to enhance the development of systems of strategic investment planning and management and the development of documentation. Specifically, we can help with design, description and analysis of technology requirements for investment management processes. This is necessary for trade booking, position evaluation and management, measuring, monitoring and mitigation of market risk. This service objective is to advise on technology improvements, toolkits for specific purposes and additions to the existing client infrastructures. We can consult on internal development of libraries for product and strategies evaluation and on developing of automated risk and performance management systems up to the levels of business and functional specifications. We can also make analysis and recommendations for purchasing of commercially available vendor solutions for trading, market access, return attribution and risk management. The second stage in formation and execution of an Information Technology Strategy Program (ITSP) is the analysis and assessment of the current state of strategic alignment between the investor’s established business strategy and existing IT services and operations. From the perspective of that current state as-is for the client at that time, a future-state projection is created to express the vision, purpose, value, and commitment to move toward a holistic enterprise strategy wherein business and technology strategy are very tightly coupled to achieve optimum outcomes for the corporation or organization. The Current State Analysis and Assessment element of the ITSP consists of: (1) a ‘RACI’ (Responsibility, Accountability, Consult, Inform) matrix of stakeholder and participant roles; (2) a ‘SWOT’ (Strengths, Weaknesses, Opportunities, Threats) analysis;