Press Release London, Nice, Paris, June 1, 2017
EDHEC-Risk Institute study shows that goal-based investing principles can be used to design scalable retirement investment strategies that meet individual investors' needs
Existing financial products marketed as "retirement investment solutions" do not meet the needs of future retirees, which involve securing their essential goals expressed in terms of minimum levels of replacement income (focus on safety), while generating a relatively high probability of achieving their aspirational goals expressed in terms of target levels of replacement income (focus on performance). Meaningful solutions should therefore combine safety and performance to meet this dual objective.
In a new publication entitled "Mass Customisation versus Mass Production in Retirement Investment Management: Addressing a "Tough Engineering Problem", EDHEC-Risk Institute analyses how the retirement investing problem can be formally framed within the context of dynamic portfolio choice theory.
The main contribution of this paper is to show that financial engineering can be used to address the "tough engineering problems" posed by the scalability requirements. Indeed, it is hardly feasible to launch a customised dynamic allocation strategy for each investor, and the challenge is to address the needs of a large number of investors through a limited number of funds. To this end, the authors extend portfolio insurance and dynamic core-satellite techniques to the retirement investing context. The solutions make use of a goal-hedging portfolio, which is intended to replicate the value of a deferred annuity, and a performance-seeking portfolio, the objective of which is to efficiently harvest risk premia in order to deliver long-term performance. The allocation to these two building blocks is a function of the risk budget, defined as the difference between the current portfolio value and a suitably chosen floor.
In this study, the authors demonstrate that it is possible to construct strategies scalable with respect to entry point levels, contribution levels and aspirational goals, which vary greatly across investors.
The authors also show that mass-customised retirement solutions perform better than traditional balanced or target-date funds in reaching investor's goals and have an acceptably low opportunity cost with respect to their fully customised counterparts.
Professor Lionel Martellini, Director of EDHEC-Risk Institute, said "dynamic goal-based investing principles can be used to design a parsimonious set of retirement investment strategies that meet the needs of individual investors preparing for retirement as they secure an essential level of replacement income and also have good probabilities of generating much more replacement income than what they would have obtained by investing in annuities, and this is possible in a cost-efficient and reversible format."
A copy of the EDHEC-Risk Institute publication can be found here:
Contact:
For more information, please contact: Maud Gauchon
Tel.: +33 493 187 887 - E-mail: maud.gauchon@edhec-risk.com
To visit our web site: www.edhec-risk.com
About EDHEC-Risk Institute
Academic Roots & Practitioner Reach
Since 2001, EDHEC Business School has been pursuing an ambitious policy in terms of practically relevant academic research. This policy, known as "Research for Business", aims to make EDHEC an academic institution of reference for the industry in a small number of areas in which the school has reached critical mass in terms of expertise and research results. Among these areas, asset and risk management have occupied privileged positions, leading to the creation in 2001 of EDHEC-Risk Institute, which has developed an ambitious portfolio of research and educational initiatives in the domain of investment solutions for institutional and individual investors.
This institute now boasts a team of close to 50 permanent professors, engineers and support staff, as well as 38 research associates from the financial industry and affiliate professors. EDHEC-Risk Institute is located at campuses in Singapore, which was established at the invitation of the Monetary Authority of Singapore (MAS); the City of London in the United Kingdom; Nice and Paris in France. The philosophy of the institute is to validate its work by publication in prestigious academic journals, but also to make it available to professionals and to participate in industry debate through its position papers, published studies and global conferences.
To ensure the distribution of its research to the industry, EDHEC-Risk also provides professionals with access to its website, www.edhec-risk.com, which is entirely devoted to international risk and asset management research. The website, which has more than 70,000 regular visitors, is aimed at professionals who wish to benefit from EDHEC-Risk's analysis and expertise in the area of applied portfolio management research. Its quarterly newsletter is distributed to more than 200,000 readers.
EDHEC-Risk Institute also has highly significant executive education activities for professionals. In partnership with CFA Institute, it has developed advanced seminars based on its research which are available to CFA charterholders and have been taking place since 2008 in New York, Singapore and London.
In 2012, EDHEC-Risk Institute signed two strategic partnership agreements, with the Operations Research and Financial Engineering department of Princeton University to set up a joint research programme in the area of asset-liability management for institutions and individuals, and with Yale School of Management to set up joint certified executive training courses in North America and Europe in the area of risk and investment management.
As part of its policy of transferring know-how to the industry, EDHEC-Risk Institute has set up ERI Scientific Beta. ERI Scientific Beta is an original initiative which aims to favour the adoption of the latest advances in smart beta design and implementation by the whole investment industry. Its academic origin provides the foundation for its strategy: offer, in the best economic conditions possible, the smart beta solutions that are most proven scientifically with full transparency of both the methods and the associated risks.
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