“We use quantitative analysis to help customers create robust portfolios that take into account their savings goals and risk appetite levels,” says QRG Asset Allocation team leader Romain Perchet. “Our mandate is to produce investment models that enable more rapid analysis of all available investment solutions, and that improve performance for our clients.”
Three types of clients and four types of requests
The team’s clients fall into three categories: the retail banking network of the BNP Paribas group and its private banking service; the sales people at BNP Paribas Asset Management who promote BNPP AM products to other banks and financial institutions; and the Multi-Asset Management portfolio managers at BNPP AM.
Typically, these clients come to the team with four different types of request
- To design new funds
- To develop new services for the BNP Paribas group’s networks and retail or private clients
- To develop, with the help of BNPP AM sales teams, offerings for external clients such as insurance companies and private banking customers
- To innovate for a specific market segment.
For all these requests, the QRG Asset Allocation team uses quantitative methods to improve portfolio construction and long-term performance.
Designing a new fund
When sales people come to QRG Asset Allocation for help with a product to address the evolving needs of the short-term savings market, Romain Perchet and his colleagues first seek to define the appropriate investment universe, e.g. sovereign bonds, low-risk bonds, a specific industrial sector, etc.
Next, they determine the appropriate allocation of funds and how each fund will be managed from day to day. This can include a short-term risk measure to improve flexibility in case of crises.
QRG Asset Allocation helps BNP Paribas Group’s retail and private banking networks via the Robo Advisor service. This allows for the creation of a personalised investable portfolio of funds. Robo Advisor is currently being used to produce a French life insurance product for high net worth individuals.
Called My Mandate, the investment tool is an innovation in that it enables customers to select investment options via an online questionnaire. In much the same way as a new car buyer might choose options such as paint colour, tinted windows, power steering or a sunroof, a private banking client can build his or her own investment portfolio from categories such as socially responsible funds, new technologies or emerging markets.
The end product is an entirely personalised investment solution. This type of offering is available for the retail networks of the BNP Paribas group.
“In the past, private banking customers had only a limited number of investment options,” says Romain Perchet. “Today, with the tools we provide, they can be actively involved in the construction of their portfolios, which can be personalised one hundred percent.”
Tackling the changes in the pension savings market
In addition, the QRG Asset Allocation team focuses much of its efforts on designing and innovating retirement offerings that take into account the changing legislation in France and Europe on retirement savings plans.
Romain Perchet explains that in France, the government up to now managed such plans. Legislative changes are in the works to encourage the French to manage their retirement savings better, as is common in the US, where private citizens and companies handle retirement savings plans.
“Because of these changes, we are designing more and more flexible funds that enable customers to save more effectively,” says Romain Perchet. “For example, certain now enable savers to shift investments between equities and money markets, and between different credit and investment universes. A well-designed algorithm can greatly improve one’s chances of a better retirement savings outcome.”
Romain Perchet and team frequently start the process of designing the retirement fund by determining the ‘glide path. This concerns the length of a given retirement investment and depends on the age of the investors: 25-to-45 or 45-to-55 years old, for example.
Typically, the longer the glide path or how far from retirement the group is, the greater the level of risk in the investment portfolio. Conversely, the shorter the path, the more conservative the portfolio.
With the investment universe and glide path information in hand, the team uses quantitative analysis and mathematical models to provide the best possible asset allocation. The result is a ‘target-date fund.’
Quantitative tools for multi-factor allocations
The fourth area of focus for Romain Perchet and team, called Multi-Factor Allocation (MFA), involves designing optimisation algorithms for BNPP AM’s Multi-Asset Management portfolio managers. Once a week, their investment committee meets to discuss the current economic scenarios and recommend the best tactical asset allocation from among the 150-odd funds the committee considers.
“Our MFA algorithms enable us to turn the committee’s recommendation into active portfolios in a way that is robust, easily industrialised and transparent,” says Romain Perchet. “This tool enables portfolio managers to spend more time on fundamental research as well as on explaining their chosen strategy to the clients, rather than spending time replicating the committee’s strategy portfolio by portfolio. Quantitative analysis enables us to build portfolios better and faster, and therefore to generate better performance for our clients. That’s the key.”
- No madness in this – quantitative – method
- AI and machine learning – new tools of an old trade
- Just what the doctor ordered
Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. The views expressed in this article do not in any way constitute investment advice.
The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns.
Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
 For background, read BNP Paribas Asset Management acquires a majority stake in Gambit Financial Solutions