4 renewed industry partnerships to advance the frontiers of knowledge
In order to advance the frontiers of knowledge and foster industry innovation, EDHEC-Risk Institute implements research programmes focusing on interrelated aspects of investment solutions.
The EDHEC-Risk research chairs involve close partnerships with industry partners and a commitment from EDHEC-Risk to publishing related articles in international academic journals as well as releasing the research results to the investment management profession (asset & wealth managers, institutional investors and regulators) through the wide distribution of practitioner-oriented publications and presentations at industry conferences and webinars
The investment industry faces uncertainty due to the current COVID-19 pandemic. In these very challenging times we are delighted to have launched 4 research chairs with major names from the industry, relying on the Institute’s expertise in Risk Premia Harvesting, Retirement Investing and Sustainable Investing:
ETF, Index and Smart Beta Investment Strategies, in partnership with Amundi ETF, Indexing & Smart Beta
The chair will analyse developments in the use of exchange-traded funds (ETFs) as part of the asset allocation process through its annual survey. In the 2021 survey, we aim to provide insights into investor perceptions of exchange-traded funds (ETFs) and of smart beta and factor investing strategies, building on the analysis of this year’s responses and relating them to past annual survey results. Almost every year since 2006, EDHEC has conducted a survey on European investors’ views and uses of ETFs. Since 2013, we have included a section dedicated to smart beta and factor investing strategies. In the 2020 edition, we added a focus on ESG (Environmental, Social & Governance) investing, both in the context of ETFs and smart beta and factor investing strategies.
Previously, EDHEC-Risk conducted research aimed at measuring and managing ESG risks in sovereign bond portfolios. The main objective was to assess whether including ESG constraints through a significant improvement of the portfolio ESG score can be achieved without a substantial increase in absolute and relative risk budgets, or a substantial decrease in expected performance. This research also explored ESG momentum strategies – exploiting time-series differences in ESG scores – in sovereign bond markets.
Our partnership with EDHEC-Risk Institute continues to help cement Amundi’s position as a thought leader in investment management and enhance Amundi’s strong engagement with investors looking to meet their asset allocation goals.
Fannie Wurtz, Managing Director at Amundi ETF, Indexing & Smart Beta
Goals-Based Wealth Management and Applications to Retirement Investing sponsored by Bank of America
In the first year of the research chair on goals-based wealth management and applications to retirement investing, we proposed a formal analysis of efficient investment strategies for individuals and households in the decumulation phase of their life-cycle. To that end, we created a comprehensive and flexible framework that provides personalized advice on retirement investment decisions in the presence of life event risk, with a relatively rich menu of investment opportunities that includes balanced funds, target date funds and equity indices, but also annuity and long-term care insurance products, for which we use realistic market quotes.
Our main finding is that the presence of long-term care risk strongly reduces the optimal demand for annuities for most individuals, which suggests that the costly reversibility of annuitization decisions can help explain the annuity puzzle for individuals facing life event uncertainty. We also find that the introduction of annuity products with upside potential (e.g., variable annuities) has a positive impact on investor welfare.
For the second year of the research chair, we plan to extend the framework in three directions by:
- introducing GBI strategies into the asset mix: the main goal here is to perform a comparative analysis of the benefits of GBI strategies, particularly in comparison with variable annuities.
- introducing alternative welfare functions to determine the best strategy for an individual. A welfare function must account for the performance and risks associated with any given strategy as well as for the risk aversion of the individual. A suitable property of a welfare function is to provide enough penalization of investment strategies that generate high levels of bequest at the cost of allowing for little or no income withdrawal. We plan to test different indicators to measure the merit (to be maximized) and risk (to be minimized) of a given strategy and test suitable ways to aggregate them to form relevant welfare functions.
- introducing alternative withdrawal strategies: we have so far analysed state-independent withdrawal strategies, where the withdrawal was given by a fixed proportion of initial wealth (say 4%). We expect to test the benefits of state-dependent strategies. In other words, we would like to analyse whether for a given investment strategy introducing some form of flexibility for the withdrawal strategy would allow for higher welfare levels. Next, we propose to analyse the joint selection of state-dependent investment and withdrawal strategies suitably chosen to maximize investor welfare.
This research is fundamental to delivering a client-centric, goals-based approach to investing. We expect to use the insights to explore more effective and efficient ways of providing retirement-related advice and guidance to our clients.
Anil Suri, head of Asset Allocation and Investment Analytics for the Chief Investment Office of Merrill and Bank of America Private Bank
Designing and Implementing Welfare-Improving Investment Solutions for Institutions and Individuals, in partnership with FirstRand
EDHEC-Risk Institute and FirstRand have partnered to launch a three-year research chair entitled "Designing and Implementing Welfare-Improving Investment Solutions for Institutions and Individuals". This chair aims to improve our understanding of the interaction between the three forms of risk management that the modern portfolio has shown to be useful for the design of optimal portfolios:
- Diversification, for the construction of well-diversified performance-seeking portfolios;
- Hedging, for the construction of liability- or goal-hedging portfolios;
- Insurance, for efficient allocation to the performance-seeking and hedging portfolios, so as to achieve essential goals while keeping room for upside.
The 2020 research project focuses on the joint use of diversification and insurance: given a universe of risky constituents such as stocks, should one diversify first and then add an insurance layer, or engineer one insured portfolio per constituent and diversify across these portfolios? We found that the order in which diversification and insurance are performed has an impact on performance and volatility, and using diversification first generally leads to higher returns because insurance has a lower opportunity cost when it is applied to a diversified portfolio than to individual assets.
In 2021, we will continue our investigation of the connections between the three forms of risk management with a project on “precision investing”. Just as “precision medicine” is about customizing healthcare treatment for sub-groups of patients, precision investing is about constructing portfolios adapted to an investor’s situation. In delegated money management, a manager rarely takes care of a client’s whole portfolio, but it would improve client welfare if the manager were to provide a portfolio whose composition depends on the other portfolio(s) held by the client and on the allocation strategy that the client has regarding the various building blocks.
Despite the difficulties of 2020, our partnership with EDHEC-Risk Institute has already led to material value and efficiency gains across many portfolios while increasing the depth of our skills and investment acumen. The ability to service client needs within a multi-stakeholder context remains a key focus for FirstRand and we look forward to expanding our knowledge, understanding and experience as part of the 2021 topic and area of focus. Reaching across many of FirstRand’s core capabilities, this phase provides a great opportunity to further the precision with which we service our clients’ needs.
Albert de Wet, FirstRand Group Treasury
Real Estate in Modern Investment Solutions, in partnership with Swiss Life Asset Managers
The main objective of the chair is to contribute to the casting of real estate investing into the framework of modern portfolio theory, with a particular emphasis on the role of real estate investments in institutional and retirement portfolios. After reviewing the relevance of selection and allocation applied to dedicated forms of unlisted real estate investments, the research team will further focus on the construction and implementation of real estate portfolios and examine how the latter may prove to be key ingredients of the performance portfolio or hedging portfolio of innovative liability-driven or goals-based investing solutions.
EDHEC-Risk Institute is at the forefront of factor investing techniques and is ahead of the game in research on illiquid assets, as proved by its initiative in hedge fund, infrastructure and property indices. We have known the team, in particular Lionel Martellini, for many years and we are delighted with this partnership.
Béatrice Guedj, Head of Research and Innovation at Swiss Asset Managers (France)
An EDHEC-Risk Institute research chair therefore enables its sponsor to support high quality, independent research that will be made public; this is an ideal way to demonstrate the organisation’s interest in and commitment to an important field valued by the idustry.