PanAgora Fleshes out Risk Parity Suite

(September 25, 2012) – The Financial Times is all over it, Sacramento Bee is covering it, and Yahoo! just released an Investing 101 video on it. 

Risk parity just might be mainstream. 

Institutional investors spotted the movement early—aiCIO’s Risk Parity Survey is in its second year, after all—and interest hasn’t abated. 

“There’s still a long way to go, but it’s a really hot item in the institutional space,” Travis Robinson, a quantitative analyst at Salient Partners, recently told aiCIO. “The traditional ideas—cap-in allocations, that markets are efficient, that diversification works on its own—have left people really unsatisfied.” That’s why, in Robinson’s experience, “just about every public pension plan has shown an interest in risk parity, or has a product in their portfolio.” 

Fulfilling that institutional appetite for uncorrelated, diverse, and risk-balanced portfolios is an ongoing process. It’s still early in the game, but the major players like Bridgewater Associates are finding an increasingly crowded field. 

Just a few weeks ago, Boston-based PanAgora Asset Management launched an expanded “Diversified Risk” division, including a wide variety of off-the-shelf and customizable risk parity strategies. PanAgora serves mainly institutional clients, and is clearly striving to work its risk parity line around their unique demands. For instance, the firm says its risk parity approach “can be used to construct concentrated equity portfolios designed to achieve tailored exposure to certain attributes including lower volatility, as well as higher dividend yield and quality, while maintaining less risk concentration than other more concentrated approaches to portfolio construction.” 

While PanAgora’s offerings include standalone equities and commodities strategies, the firm views risk parity “holistically,” and designed its new capabilities to work across entire portfolios. The firm contends that it use of “bottom-up risk parity within each of the asset classes” will better allow investors to gain uncorrelated equity, fixed income, and commodity exposure, while also “tactically shifting risk-allocations…to adapt to changing market conditions without steering portfolios too far away from balanced risk exposures.” 

The holistic approach to risk parity was similarly championed by Bob Prince, Bridgewater’s co-chief investment officer, in a recent interview with aiCIO. “When you think about what a strategic allocation is, it is your agnostic starting point,” he said. “Alpha is then produced by tactical deviations around that. Risk parity is the mix of assets an investor would want to hold absent of a view of markets…. Also, risk parity is not a bond portfolio—a bond portfolio would be another concentrated portfolio with vulnerabilities to inflation and rising interest rates. A risk parity approach neutralizes yourself to any particular asset class or economic environment. You just need enough bonds to create balance.” 

PanAgora, for one, isn’t tossing out equities with its push further into risk parity. In fact, it revamped its highly quantitative “Diversified Arbitrage” strategy for public and private equity investments along with its balanced-risk line. The firm is aiming to improve the accuracy of its stock forecasts to better “add-value under varying market conditions and over different horizons in order to generate higher returns with greater stability and smaller draw-downs.” 

It’s a volatile world out there, and, more and more, asset managers are stepping up to try and find some stability for their institutional clients. Of course, there’s a little something in it for them, as well.