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This study revisits asset allocation strategies that aim at actively managing the volatility of multi-asset-class portfolios in response to time-varying volatility forecasts.
We find that active volatility management is beneficial for many major asset classes
and for mixed asset portfolios, leading to more consistent wealth accumulation over
In cross-validations, we find that fast-moving volatility forecasts seem beneficial because
they have better forecasting accuracy and produce economic gains in terms of risk
accuracy and performance.
We also find significant reduction of tail risks for most assets, except for bonds, where
the reduction is minor.
After a period of extreme volatility during 2020, Dr Michael Stamos and Dr Thomas Zimmerer from the Allianz Global Investors Multi Asset team published their thoughts on active risk management in the well-regarded Journal of Portfolio Management. Our Multi Asset team’s 80 portfolio construction and asset allocation experts have used these and other insights to manage the risks of large diversified portfolios since 1997.
Rising prices for goods and services are one of the biggest risks for investors in conventional government bonds. But there are ways for active managers to generate positive returns from rising – and falling – inflation.
Fixed-income returns depend on what macro scenario is thought most likely over the investment horizon and how far that is reflected in market prices today
The four key risk premia for nominal government bonds are the real risk-free rate of return, the real term premium, the expected inflation rate and the inflation risk premium
Changes in expectations of how these four factors will evolve determine the direction of travel for nominal government bond yields
An active fixed-income manager seeks to generate returns from each of these components separately using a combination of instruments – a skill that is critical amid an uncertain inflation outlook
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