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Irish Pensions Magazine Autumn 2013
Expert Opinions
Offsetting materialises when investment ideas are
negatively correlated. The ideas could then offset
each other leading to a loss of effectiveness and little
benefit from high conviction trades.
Drawdown tools
The easiest way to manage drawdown reduce the
probability of it happening. The first step to avoid
drawdown is to make the diversification of the portfolio
as effective as possible. Then sizing the position
appropriately as illustrated in the previous section
should dilute the effect of unsuccessful investment
ideas. It should prepare the ground for an additional
layer of protection through drawdown management.
As an investment idea is formulated, drawdown levels
are set. These levels should determine the maximum
loss that can incur in a portfolio from the investment
idea. For a highly liquid instrument, the drawdown
strategy should mimic being protected by an option
but without having to pay the premium. This leads to
an absolute return mind-set on the investment idea.
Highly diversified investment ideas with appropriate
levels of risk are still the best way to ensure that
one poorly performing investment strategy will not
adversely affect overall performance.
Drawdown management helps protect the fund from a
single poorly performing investment idea. However, it
won’t protect against multiple unsuccessful investment
ideas. This can happen either due to the low success
ratio of the investment ideas, or due to an undesired
correlation between the positions. In both cases,
monitoring tools on groups of investment ideas using
ex-ante and ex-post measures should be done in a
Page 1 I Dublin, June 2013 Pioneer Investment Conference
For Professional Clients acting in an Intermediary Capacity or For Own Account Use Only
and Not to be Distributed to the Public
Portfolio Construction and Risk Budgeting
An Integrated Model
Risk Measurement
Strategies Definitions
Risk Budgets Planning and Review
Delegated Strategies Management
Strategies Composition Optimisation
Efficient Drawdown Management
…
SERVICE PROVIDER
PARTNER
RISK
RISK-ADJUSTED
PERFORMANCE
systematic way. This helps identify, at an early stage,
deviations from expected drawdowns that then allow
prompt corrective actions.
The risk budgeting system has been one of Pioneer
Investments most important developments in recent
years. Combining specialised investment skills with
a strong risk management discipline allows active
managers to better exploit market opportunities,
while at the same time paying significant attention to
drawdown management – making all the difference for
clients.
Unless otherwise stated all information and views expressed
are those of Pioneer Investments as at 13th August 2013
These views are subject to change at any time based on
market and other conditions and there can be no assurances
that countries, markets or sectors will perform as expected.
Investments involve certain risks, including political and
currency risks. Investment return and principal value may
go down as well as up and could result in the loss of all
capital invested.
Pioneer Investments is a trading name of the Pioneer Global
Asset Management S.p.A. group of companies.
Article Author
Dave Santry
Head of Irish Institional Business
Pioneer Investments
