Background

Clear CM has created a range of discretionary portfolios that can be accessed by financial planners through a number of investment platforms. The current range embodies the multi asset philosophy of investing that sets Clear CM thinking apart from many other discretionary managers

Clear CM offers a range of portfolios to meet adviser needs and those of their clients – from innovative absolute return portfolios to the Classic long only portfolios – implemented using either active managers and assets or passive instruments. In addition, bespoke portfolios can be built for individual advisers or their clients.

For implementation efficiency (cost control), and to capture the skills of partner fund management groups, a long-term core holding is retained in multi asset portfolios managed by Clear CM. In addition, low cost tracker and passive funds are held as satellite holdings which are more actively traded depending on the firm’s short-term views of markets and how best to position portfolios tactically, while still holding true to long-term asset allocation objectives.

Such a tactical decision could, for example, be taking an overweight position on equities if it is felt there is a divergence from long-term equity prices and current values – i.e. that equities are undervalued and when corrected to expected valuations the portfolio will benefit from increased exposure to this asset class.

This long-term asset allocation strategy is based on forecast capital market conditions and cross correlated with historic returns in various market conditions.

This is essentially to see how asset classes “typically” behave in varying economic conditions.

Many academic studies have shown that this asset allocation process is a primary determinant of return.

Clear CM’s investment team uses four quantitative tools to ensure a robust process and that assumptions made are tested rigorously (see table).

Clear Risk Based Asset Framework

  • Risk-factor based asset allocation framework centered on the underlying asset characteristics.
  • Using weighted market indices to assess the risks associated with the investments that make up the models.

Black-Litterman Multi-Asset Model – developed at Goldman Sachs by Fisher Black and Bob Litterman

  • Based only on historical co-variance, the Black-Litterman model estimates what return would be required to ‘clear’ the market given its capital make-up.
  • This provides an objective framework that avoids the bias of short-term asset allocation.
  • This provides a theoretically correct starting or “Strategic Allocation point”.
  • Allows the manager to realistically understand the non-linear risks that may be present within the theory. The model is also able to adjust the equilibrium return to take account of a view to future asset class behaviour.

Equilibrium Efficient Frontier Modelling

  • The original Modern Portfolio Theoretical model has many limitations but is useful in considering the likely long-term characteristics of any Strategic Asset Allocation.

Monte Carlo Testing

  • A robust and dynamic Monte Carlo statistical testing model is also available and is used to calculate possible portfolio extremes over historical periods.