The Milliman Managed Risk StrategyTM aims to stabilize the volatility of an investment portfolio during periods of significant and sustained market declines, providing investors with the same risk management techniques used by major financial institutions around the world.
Since the early 1950s, most attempts at managing portfolio risk have relied heavily on asset allocation—diversifying exposure among asset classes that have exhibited historically low correlation to one another. This approach has proven to be less effective during major downturns. In 2008, for example, nearly every major asset class was affected by the global economic downturn.
The high correlation among many of the world’s major asset classes was likely not a black swan event, but rather the inherent reaction of ever-more-connected global economies.
The declining effectiveness of conventional risk management and the introduction of new risk management strategies have the potential to transform the way people manage risk and save for retirement. The Milliman Managed Risk Strategy brings the same risk management techniques to investors that have been used by some of the world’s largest companies, including through the most recent global market downturn. Today, the Milliman Managed Risk Strategy is included in a range of investment options totaling $60 billion in portfolio value.
How it works
The Milliman Managed Risk Strategy uses hedge assets (typically exchange-traded futures contracts) that act independently of an underlying portfolio, which allows investors to remain invested in current assets. The Strategy consists of two risk management processes that actively account for changing market conditions. Following are brief descriptions of these processes, which are designed to help foster growth in bull markets while defending against losses in down markets:
- A volatility management process, which is designed to keep the risk level of the portfolio from increasing significantly during periods of market turbulence. This is accomplished by continuously monitoring and reacting to specific changes in the market, allowing the overall portfolio to effectively target a predetermined volatility level and accurately maintain it over time.
- A capital preservation process, which adjusts futures positions on a daily basis, subject to market-based thresholds, with the goal of maintaining the capital of the portfolio on a rolling five-year basis. In a severely declining market, futures gains are generally harvested and reinvested in growth assets in an effort to maximize long-term returns.
Financial futures contracts—contractual agreements to buy or sell a financial instrument at a predetermined price in the future—established a way for large institutional investors to develop sophisticated and cost-effective safeguards in an effort to effectively weather volatile markets. The financial futures market is one of the most transparent and liquid markets in the world and accounts for over US $1 trillion per day in contract value.
Milliman does not rely on computer trading models to execute each trade, but on a global team of experienced traders operating from Chicago, London, and Sydney. As a result, Milliman’s trading team can incorporate market factors into the decision making process that a computer model cannot.
The Milliman Managed Risk Strategy:
- Targets a specific volatility level. Milliman monitors portfolio risk around the clock and reacts to specific changes in the market. This approach aims to reduce the portfolio's volatility during periods of market turbulence by targeting a predetermined volatility level and then striving to maintain that level over time.
- Employs a capital preservation strategy. During periods of significant and sustained market declines, the Milliman Managed Risk Strategy uses a futures-based risk management process that adjusts positions on a daily basis with the goal of reducing losses and maintaining the capital of the portfolio.
- Avoids value-destroying behaviors. The Milliman Managed Risk Strategy automatically locks in gains from favorable returns on underlying investments and harvests gains from the hedge portfolio during severe market corrections to avoid value-destroying behaviors like buying high and selling low.
- Requires no movement of underlying portfolio assets. The Milliman Risk Management Strategy acts as a basket of hedge assets and operates independently of the underlying portfolio, which allows investors to remain invested in current assets.
- Offers institutional-quality access to a global risk management authority. Milliman Financial Risk Management LLC provides investment advisory, hedging, and consulting services on $150 billion in global assets (as of September 30, 2014).
To learn more about the Milliman Managed Risk Strategy, please contact your Milliman consultant, or email us.
Issued by Milliman Pty. Ltd. (Milliman AU) (ABN51 093 828 418) (AFSL 340679) Please contact Milliman to obtain more information about the products and services we offer as not all products and services may be suitable for you.
The Milliman Managed Risk Strategy is available only to persons who meet the requirements for a "wholesale client" under the Corporations Act and trustees of superannuation funds with net assets of at least A$10 million (Clients). Clients must have an agreement with Milliman Pty Ltd ABN 51 093 828 418 AFSL 340679 (Milliman) to implement the strategy (Service) against a portfolio of the Client's equity investments (such as listed shares), which enables the Client to use the Service or to offer the Service to members of the Client's superannuation fund.
Milliman makes no recommendation and gives no statement of opinion to Clients, members of Clients' superannuation funds or their respective advisers in relation to use of, or any investments, in the Service. Before considering whether to use the Service, Clients may wish to obtain professional advice (including taxation advice). Investments in, the Service are subject to market and other risks, and no guarantee or assurance is given by Milliman that such investments will not give rise to losses or that performance of the Service will completely reflect inversely the performance of equities markets generally or a Client's portfolio of equity investments. While generally assets which are acquired through use of the Service will be liquid, this may not be the case in all circumstances. Further, during periods of sustained market growth, the return to Clients from the combination of their portfolio of equity investments and assets held in the Service should be less than if the Client did not participate in the Service. Fees and conditions apply to use of the Service.