Strategy

We identify risk by determining the risk of the investments held in the portfolios.  These may be traditional investments like those found in many funds in the marketplace, but may also include alternative asset class investments, such as property and infrastructure, absolute return funds, hedge funds, real estate or private equity.

For more information on alternative asset class investments, visit our glossary of terms here.

We identify areas of risk and construct portfolios according to client requirements and risk appetite.  A brief example of this is the difference in approach between the following:

• Systemic risk, or market risk, relates to general market movements, not just a particular stock or industry.  Examples of systemic risk might be interest rate changes, inflation, recession, or war.  This type of risk is unpredictable and impossible to completely avoid. It cannot be mitigated through diversification, only through hedging or by using the right asset allocation strategy.
• Non-systemic risk is company or industry-specific, and relates to a particular security or industry within the portfolio. For example, a new competitor, a regulatory change, a management change, a produce recall. This can be reduced through diversification.

By carefully analysing and measuring the risk of the portfolios, we can add value by assisting Advisers in matching Client requirements with appropriate investment solutions.

We undertake specialist research for each investment we make.  The NZ equity market is a different animal than the US equity market; research and execution requirements for a local market investment differ from foreign ones.

We proactively research and analyse potential investments in order to provide effective long-term solutions. Our knowledge on the advances in portfolio construction and management is second to none.

In the last few years we have travelled to Singapore, San Francisco, Boston, Los Angeles, New York and London visiting fund managers and attending seminars on subjects including Advances in Asset Allocation, Alternative Investments, and Portfolio Construction using Risk Premia.

Practical construction

We construct portfolios in a practical manner to address the real-world requirements of clients.

Our benchmark portfolio construction approach incorporates considerations such as:

• liquidity of the portfolio
• client investment horizon and objectives
• sustainable growth
• default risk
• risk adjusted return

For a full explanation of these terms, please select any above, or visit our glossary of terms.

Markets are dynamic and historical returns may be very unreliable when considering what to put in a portfolio now for the medium and long-term time horizon.

Caliber adopts a dynamic asset allocation process, one that addresses what is happening now.  For example, if we believe we are now at the end of a 30-year bull run for bonds we would account for that in our assessment of the risk exposure to bonds. This may mean that we end up with a different sized exposure than the standard exposure we would have otherwise had.

The risk exposure of the portfolio is further broken down into factor exposures.  For example, a broad equity market exposure may be broken down into value stocks (low price to earnings ratio), small cap (i.e. small companies) or momentum stocks (popular stocks). Fixed income exposure may be broken down into duration or credit-spread considerations.

Because we are an institutional investor that can invest large sums under a single account, we can get genuine wholesale pricing.  We will buy securities directly and invest in index-like vehicles wherever possible, and only use active managers when we feel there is a benefit in doing so.

Many fund managers will construct portfolios that have holdings very similar to market indexes (e.g. the S&P 500).  As a result, clients may be charged active management fees for portfolios that outperform easy-to-beat market indexes, yet still show relatively poor absolute performance.

Caliber’s approach is to identify the exposures that we want and then make purchases either directly or by pooling funds from many individual investors into an aggregated investment vehicle. (Pooling means that investors benefit from economies of scale and lower trading or custodian costs.)

Caliber may use active managers in two ways:

1. When it’s difficult or impractical for us to gain market exposure directly or through index funds;
2. To obtain ‘alpha’.  Alpha is the residual return over and above normal market returns; the out-performance, attributable to skill, of a specialist fund manager.

Constant and ongoing monitoring and review of portfolios is critical to their success.  We have a structured programme where we review all components of portfolio construction and management, to ensure the best possible performance.