Written on 04 January 2021.
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 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
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:
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:
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
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.