Tailored Risk Factor Consulting

Innova offer an advisory service for institutional clients based on a deep understanding of risk factors and their role in constructing and managing portfolios

 

Innova constructed its proprietary risk factor framework in conjunction with the Milliman Group. This framework involved identifying risk factors for each asset class, then determining the causal relationships between factors (i.e. calculating what drives correlations between risk factors and how they change in different market environments).

 

From these risk factors, an expected range of returns is then determined for each asset class, based on current prices and market conditions.

 

The model built by Innova and Milliman is run monthly to obtain these asset class forecasts, which are the cornerstone of Innova’s asset allocation decision making. All the outputs of the model are reviewed, and then brought to the team to discuss whether any asset classes/exposures look attractive or otherwise. Weekly meetings provide a qualitative overlay to the quantitative process, and allow consideration of external factors that may be strongly influencing the outputs and allow the team to consider potential enhancements to the model. However, while qualitative input is important, its primary function is to test the quantitative assumptions, and the team will only override the model if there is a strong qualitative view.