At a time when the outlook for fixed income is so uncertain, Aquila Capital intends to launch a Risk Parity Bond strategy. This is the first strategy of its kind in the market, and is designed to provide fixed income investors with a truly diversified and liquid counterbalance to their existing exposures, which may be perceived as vulnerable should fixed income markets reverse.
The objective is to offer investors long term stable returns regardless of the twists and turns in the economic and fixed income cycles.
The strategy blends the diverse characteristics of the uncorrelated asset types within the fixed income universe from which sustainable risk premia can be extracted. This systematic strategy applies the same Risk Parity allocation principles as Aquila Capital’s multi-asset AC Risk Parity strategy (including the AC Risk Parity 7, AC Risk Parity 12 and AC Risk Parity 17 Funds), which has delivered strong risk-adjusted returns since 2004, including positive performance in 2008.
Aquila Capital’s Risk Parity Bond strategy will invest with equal risk weightings across four types of fixed income asset. Each is uncorrelated to the others. They are government bonds, corporate bonds, carry positions in emerging markets and inflation-linked bonds. The correlations of each of these asset types to different phases of the economic and fixed income cycles are also highly varied. This means that as one asset type goes down, one or more of the others should rise. This helps to mitigate risks and stabilise returns across the portfolio on a sustainable basis.
Torsten von Bartenwerffer, director of portfolio management at Aquila Capital, says: “Aquila’s new Risk Parity Bond strategy is a world first. It uses the same diversification and risk equalisation principles as our multi asset Risk Parity funds. Capital is allocated on the basis of the risk which an asset contributes to the portfolio rather than its predicted returns. The strategy is not based on market timing, but instead focuses on the management of uncertainty through effective diversification.”
Stuart MacDonald, managing director at Aquila Capital, says: “Aquila’s Risk Parity Bond strategy provides an effective antidote to the current uncertainties faced by so many institutional and other investors who need to maintain fixed income exposures in their portfolios. Many market commentators see a ‘great rotation’ from bonds to equities, driven by economic recovery, rising interest rates and a pursuit of higher returns. This is seen as likely to end the 33-year bull market in bonds. Since c.50 per cent on a risk weighted basis of the Risk Parity Bond portfolio is correlated to equities, the strategy should perform in this scenario. Since the other half of the risk within the portfolio is allocated to core fixed income markets, if they remain steady or rise, then the strategy will also benefit. Risk Parity offers truly effective risk-equalised diversification across uncorrelated asset classes from which risk premia can be extracted, which means that we should be able to offer sustainable long term performance, regardless of economic and market conditions.”
