Established in 2010, Innova believes in the use of innovative technologies (where advantageous), coupled with robust research-intensive insights to generate better outcomes for clients.
By managing risk in a multi-faceted way, Innova believe over the long-term clients will experience a smoother and ultimately better investment outcome. This leads to clients that are more engaged in the advice process and more likely to achieve their financial goals.
People define risk in many ways, but Innova believe the key risk that should be front of mind when choosing an investment portfolio is the risk of not achieving your goals. This is not just volatility. There are many risks that could derail your objectives and the biggest risk of all is typically ourselves. Therefore, we have constructed portfolios that are designed to work with behaviour rather than against it. We achieve this by setting rational risk limits in our portfolio construction process. This means we never pursue returns if it means taking on unjustifiable levels of risk. Our proprietary risk management framework ensures we follow a robust, systematic process that is not influenced by market noise. We take anecdotal evidence for what it is and follow the numbers, rather than the stories.
The core of our risk management process is understanding that there are inter-dependencies between risks. In a market crash, asset classes that are commonly believed to be diversifiers to equity exposure may also experience significant loss if they are exposed to similar drivers of risk. Therefore, we first break asset classes up into the main drivers of the variability in their returns (i.e. their risk factors) and then construct portfolios based on these specific risk factors. This allows us to construct portfolios that are wholly diversified across the various drivers of portfolio risk.
OUR CORE BELIEFS
Returns matter, but behaviour matters more
Even the most well-laid investment plan can be easily derailed by destructive investor behaviour
Price drives long-term returns
Evidence shows that valuation (price) is the primary metric that has any meaningful influence on long-term returns
Asset allocation is the most effective tool for managing risk
The vast majority of the variability in portfolio returns comes from portfolio asset allocation, rather than security selection
Asset class risks are driven by their underlying risk factors
Many risk factors are inter-connected across asset classes so understanding these drivers of risk is a crucial component of portfolio construction
Diversify by underlying risk factor, not asset class
Diversification should be across sources of risk to construct portfolios that are truly robust during times of crisis
Diversify when it makes sense, not merely for the sake of it
When potential upside is high, and prices are low, concentrate. When potential upside is minimal, and uncertainty is high, diversify.
Build robust rather than optimal portfolios
Rather than proclaiming to know the unknowable we instead focus on the construction of robust over optimal portfolios
OUR PORTFOLIO CONSTRUCTION PROCESS
Innova approach portfolio construction in a systematic fashion, using a risk management framework to determine the most opportune investments given the market environment. The numbers always lead the process and the ‘why’ is our common-sense check, occurring after the analysis rather than before.
A brief overview of our portfolio construction process is below:
LONG TERM FORECASTS
Asset class and sub asset class forecasts for risk and return are calculated over a 10-year time horizon
SPECIFIC RISK CONSTRAINTS
Specific risk constraints are applied to each portfolio to determine a best fit portfolio based on our forecasts
ROBUST OVER OPTIMAL PORTFOLIOS
A maximum risk contribution for interrelated asset classes is applied to ensure our end portfolios are adequately diversified
SHORTER TERM RISK FORECASTS
We incorporate our forecast distribution of returns to control for potential low probability/high impact events (left trail risk)
We test the portfolios robustness over many different stressed economic environments
COMMON SENSE OVERLAY
We apply a common sense overlay to ensure our portfolio outputs are reasonable and are incorporating all available information.
OUR INVESTMENT VEHICLE SELECTION PROCESS
Innova are investment vehicle agnostic, in that we have no bias toward managed funds over ETFs, or active managers over passive, instead we focus on finding the purest allocation to each risk factor at the lowest possible cost. This is a predominately quantitative process to determine which managers are the best at harnessing the risk factor we would like to allocate to. We then use our judgement and experience to eliminate any potential ‘high risk’ investments rather than attempting to pick ‘winners’ with any degree of confidence.
A brief overview of our investment selection process is below:
RISK FACTORS DETERMINED
We first determine the risk factors which are the main drivers of return/risk for each manager
SCORING CRITERIA APPLIED
We apply numerous scoring criteria based on ‘alpha’ (active return above the market) and ‘beta’ (market return)
MAXIMUM FEE SCORE APPLIED
We calculate a maximum fee for each manager and deduct from their overall score if their proposed fee is greater than this
REVIEW RESEARCH HOUSE RATINGS
We review external research house ratings to eliminate any potential blow ups
DIRECT MANAGER REVIEW
We then meet with the managers directly to understand their main drivers of return and discover any potential performance/operational inconsistencies
MOST ROBUST MIX SELECTED
The most robust mix of managers is selected based the after fee expected performance with the other strategies in the portfolio
A final report is distributed for a review by the investment team and the investment commitee