The Milliman Managed Risk StrategyTM (MMRS) aims to stabilise 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 exhibited during this severe financial crisis was unlikely to be 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.
As changes in reforms and the markets occur, new alternatives are necessary to respond to those changes. In the UK, the Freedom & Choice reforms that went live in 2015 have had a dramatic effect on the market, with annuities no longer playing a central role in the provision of retirement income. Additionally, the Solvency II regulations that are now in effect will also have a bearing on the attractiveness of potential alternative retirement income products.
Although we have seen some new product offerings developed, many are just variations on existing product ideas, and we have seen no ground-breaking response to address these sweeping changes. MMRS offers a new innovative solution. It can stabilise market volatility, address big retirement risks and invest retirement earnings so that they last longer. MMRS also seeks to deliver significant cushioning during a market crisis to protect investors from losses.
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 totalling more than £38 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, 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 maximise 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 £750 billion per day in contract value.
To execute each trade, Milliman does not rely on computer trading models 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 models the assets within the investment portfolio on an end-of-day basis to provide daily adjustments to the overall risk profile of the portfolio. 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.Milliman monitors portfolio risk around the clock and reacts to specific changes in the market. 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 responsive basis with the goal of reducing losses and maintaining the capital of the portfolio.
- Avoids value-destroying behaviours. The Milliman Managed Risk Strategy automatically locks in gains from favourable returns on underlying investments and harvests gains from the hedge portfolio during severe market corrections to avoid value-destroying behaviours like buying high and selling low.
- Requires no movement of underlying portfolio assets. The Milliman Managed Risk Strategy acts as a basket of hedge assets and operates independently of the underlying portfolio, allowing investors to remain invested in current assets.
- Offers institutional-quality access to a global risk management authority. Milliman Financial Risk Management provides investment advisory, hedging and consulting services on £125 billion in global assets (through its regulated entities Milliman FRM LLC, Milliman Financial Strategies Ltd. and Milliman Pty Ltd. as of 30 June, 2016).
To learn more about the Milliman Managed Risk Strategy, please contact Neil Cantle at +44 20 7847 1537 or Neil Dissanayake at +44 20 7847 1557.
Recipients must make their own independent decisions regarding any strategies or securities or financial instruments mentioned herein.
The products or services described or referenced herein may not be suitable or appropriate for the recipient. Many of the products and services described or referenced herein involve significant risks, and the recipient should not make any decision or enter into any transaction unless the recipient has fully understood all such risks and has independently determined that such decisions or transactions are appropriate for the recipient. Any discussion of risks contained herein with respect to any product or service should not be considered to be a disclosure of all risks or a complete discussion of the risks involved. The recipient should not construe any of the material contained herein as investment, hedging, trading, legal, regulatory, tax, accounting or other advice. The recipient should not act on any information in this document without consulting its investment, hedging, trading, legal, regulatory, tax, accounting and other advisors.