EUROPE - AllianceBernstein is planning to launch a risk parity strategy for pension schemes seeking growth while minimising equity volatility.
The fund manager is looking to launch the UCITS III product, which has the working name "dynamic risk parity", next year.
Supporters of risk parity claim their strategies can offer pension funds similar returns to a traditional 60/40 equity/bond portfolio but with far less risk, making it a natural fit for schemes looking to minimise their deficits.
While a 60/40 equity bond benchmark may appear balanced from a capital allocation standpoint, from a risk point of view equities contribute far more volatility.
The solution put forward by risk parity is to reduce the equity weighting and ramp up the exposure to bonds through the use of leverage so both asset classes have a similar level of volatility.
While the strategy has gained support in the US, critics warn the use of leveraging and an over-reliance on fixed income create their own risks.
AllianceBernstein head of blend strategies Patrick Rudden said it would be "naïve" to suggest simply levering bonds up will result in continued strong performance, as part of that success has been from riding the tail wind from the secular decline in government bond yields.
However, he believes there is a case for a more dynamic approach, and one which would fit well with large funds in Europe. He said AllianceBernstein's strategy would be similar to other risk parity models on the market but would have a dynamic element not found in many other propositions.
"A lot of investors, including pension schemes, are rather addicted to an 8% expected return, and in the past they've got that expected return by leaning heavily on equities," Rudden said. "The problem with equities is they are volatile and you could say the rational answer is to de-risk and own less equities, but the problem is then you don't get your 8% return.
"People are trying to have their cake and eat it too. They want the 8% return and are looking at using more diversification, a little bit of leverage and, in our implementation, something that is a bit thoughtful and dynamic around that to keep close to the targeted 8% return but doing so with less volatility and importantly less drawdown risk and negative skew."
Read more about risk parity in the latest edition of Global Pensions.
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