Portfolio Optimization, With Quality

Michele Tanzi introduces Optimo

During the second Objectway International Customer Conference in Amsterdam, Marco Migliorin and me had the chance to show our guests and customers the technology and the benefits we implemented in our new model portfolio construction and optimization solution, Optimo.

Optimo aims to deliver an high quality investment outcome, via an asset allocation approach, so creating a win-win situation that makes both the client and the financial institution happy.

What Clients Want in Model Portfolio Construction

Clients typically ask for simpler analysis process, proven strategic choices, less manual processes and the minimum operational risks, an unified platform, certified algorithms and MiFID compliance.

According to Morningstar and its famous research of 1986 about 93% of the returns from investement were due to asset allocation. Today, the landscape is roughly the same: market movements and asset allocation, accordind to Morningstar 2010 updates, make more of 90% of returns. Just the remaining part is due to active portfolio management. We can say that model portfolio and asset allocation are the cornerstone of investment services.

Approaches, Advantages, and Limits of Asset Allocation

The strategic asset allocation is the basic framework of the investment process and the first important choice to do. The complex set of variables to manage needs a structured rules system and tools for selection, pruning and normalization.

As we recently explained, one of the most important algorithms used for this purpose is the mean-variance optimization (MVO) made by Markowitz. Then there is Black & Litterman estimation: this model enables investors to combine their unìque views regarding the performance of various assets with CAPM market equilibrium returns in a manner that results in intuitive, diversified portfolios. We implemented also Black & Litterman to give further support to our customer.

The final result of analysis and studies in Optimo is the legendary efficient frontier: the set of optimal portfolios laying on the same frontier offers the highest expected return for a defined level of risk or the lowest risk for a given level of expected return.

You can roll down the curve from a portfolio to the next, or jump from a portfolio to another by matching among different frontiers. The final result is the choice of one or more portfolios,

In order to drive the best portfolio selection, in addition to the combìnation of risk and return, other parameters are available, such as rolling volatility or long term volatility, Value at Risk, Conditional Value at Risk, or relative measures as tracking error volatility and so on.

MiFID compliant model portfolios

Optimo wants to deliver the best results with the least uncertainty and risk, We implemented the most used and recognized algorithm in the market, tried to hide complexity and create a platform that is integrated with other Objectway and easy integrable with client platforms.

Optimo answers to a definite issue: today we suffer too many risks due to a wrong asset allocation process. We assign bad model portfolios to customers, we postpone adapting to market changes, we ignore information tracing… Optimo allows you to manage asset allocation process much better: an homogenous process, less manual operations (and possible mistakes), leverage on a quantitative and certified approach, real time portfolio adjustments (no more to postpone investment committee because another hypothesis on the table in the last minute!), MiFID compliant model portfolios.

A Rich Roadmap Towards the Best Portfolio Optimization

And for Optimo we have an exciting roadmap, too. Model portfolio in financial instruments (maximum return, minimum risk, TEV), performance contribution and attribution, resampled MVO, integration of optimization approach in our Hybrid Advice and Advice platform.

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Straightforward Wealth Management Process

We feel the efforts we put into Optimo this year will bring a very good solution and good results to all our customers and we are eager to hear any possible feedback from you.

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