Institutional investors are faced with the dilemma of finding plausible alternatives while maintaining the level of risk taken within acceptable parameters. Nowadays, it is becoming less sustainable for these clients to hold cash accounts, as they are faced with negative interest rates on high cash balances.
One of the options to consider is to place these funds with professionals who are able to manage their cash within pre-determined volatility levels.
Increasing regulatory requirements along with ever more demanding financial commitments necessitate not just expert investment management but also a more accurate monitoring of volatility ceilings. This is a relatively recent additional feature to the traditional portfolios, providing flexibility and bespoke financial requirements that institutional and corporate investors look for.
At BOV Asset Management Limited, we pride ourselves with providing our institutional clients with a concentrated focus on risk management aiming to generate investment returns.
Our core methodology utilises a risk-budget approach to a dynamic asset allocation. In this respect, rather than following a static and pre-determined asset class exposure, we manage exposures to different asset classes according to the risk and return trade-off being offered by the respective market segment.
Managing a portfolio in this manner means that the exposure to fixed-income or equities is increased or decreased according to market volatility.
This enhances the possibility to achieve long-term objectives of our institutional clients, as their investment portfolios are constantly managed by taking into consideration the natural evolution of risk in financial markets. Risk is by definition volatility, thus different asset classes and investment vehicles exhibit different risk levels along changing business cycles.
A static asset allocation would expose an institutional client to a higher element of volatility in the fair value of the portfolio should risk on a static asset class suddenly increase. This could have a direct impact on the profitability of the company at year-end.
We also appreciate that the tendency of exhibiting low tolerance for risk is making risk management in these mandates ever more important. Traditionally, low risk tolerance and regulatory requirements have pushed such investors into low credit risk fixed-income securities. These securities, however tend to offer an element of interest rate risk, as the value tends to have a negative impact in periods of increasing interest rates unless this risk is adequately managed.
A risk ceiling blended with a dynamic asset allocation would allow an institutional investor to constantly pursue an element of investment return without jeopardising the overall portfolio’s tolerance for risk.
At BOV Asset Management Limited we manage portfolios for a number of institutional investors, providing bespoke mandates, tailored specifically to the needs and financial requirements of the organisation. In parallel with a highly qualified asset management team responsible for the day-to-day investment management of these portfolios, the compliance, regulatory and risk management teams ensure that the portfolios are kept within specific risk tolerance parameters.
Josianne Bezzina is senior portfolio manager at BOV Asset Management Limited.Published on Times of Malta - Maritime & Logistics 28 March 2018