Leverage Venn to close out 2019 and to get a head start in 2020
After receiving your last few managers’ returns for 2019, many of you may now be finalizing year-end board materials, preparing for annual manager reviews and revisiting your portfolio’s allocation. By updating your latest returns, portfolio lineup, and capital market assumptions, Venn can assist with many of these exercises and help you plan for the year ahead. Let’s walk through them together.
View 2019 portfolio performance and recent factor attribution (Venn Pro only)
After uploading your managers’ latest returns, use Venn to calculate historical portfolio performance, risk metrics, correlations, factor analysis and more. Break down portfolio risk, return, and factor exposures to see the investment-level contributions.
You can also add in your policy benchmark, as either a standalone return stream or a composite with multiple inputs, and toggle on “Relative to Benchmark” to see the relevant statistics, like Excess Return and Tracking Error.
Input your 2020 capital market assumptions to create customized long-term factor forecasts
Now that you have a sense of your historical performance and factor exposures, let’s dive into those Forecast metrics and update your forward-looking views. Click on the “long-term forecasts” link at the top of the Performance Summary chart and enter your capital market assumptions (or CMAs) for 2020 and beyond.
Available in Venn free on investments, example below is for Venn Pro only.
In the above example, we are assuming that global equities, as proxied by the MSCI World Index, will return 5% over the next ~3+ years on an annualized basis, whereas commodities, as proxied by the S&P Goldman Sachs Commodity Index, will return -4% annually over the same time period. Lastly, we are assuming that emerging markets, as proxied by the MSCI Emerging Markets index, will return 3% annually.1
Venn will then translate these CMAs into factor return and risk forecasts.
Given these sample long-term assumptions, this portfolio is expected to have a positive annualized return going forward of 4.4%, which is lower than the historical return of 7.7%, and a higher volatility of 8.8%, versus the historical 6.4%.
Understand your current portfolio’s factor exposures and Venn’s recommendation for your optimized allocation (Venn Pro only*)
Now that you’ve added in your capital market assumptions, let’s optimize your portfolio to see the suggested allocation changes that can help bring you closer to meeting your investment objectives.In the below scenario, the objective is to achieve the highest possible annualized return, while not exceeding 10% volatility. You can input allocation constraints to reflect the liquidity of the underlying investments before clicking “See Results”.
As per the above results, the Optimized portfolio has a higher estimated forecast return of 7.4% versus the Current portfolio’s 5.4%. You can also toggle on “Trades” to easily see the suggested allocation changes to move towards this optimized portfolio.
Now let’s switch that comparison column from the “Optimized” view to the “Last Saved” view. By adjusting the allocations/weights of your investments, you can test different strategic asset allocations to see both the historical and forward-looking impacts to your portfolio’s risk and return.
In the below example, the allocations in purple have been altered. Compare the metrics of the “Current” test portfolio to the “Last Saved” portfolio to see the results of each version. Also, view your test portfolio’s factor exposures to confirm they better align with your targets.
5 Revisit prospective managers to see if they can fill any gaps (Venn Pro only)
Now that we know what the optimal portfolio allocation looks like, let’s see if adding any prospective managers in your pipeline would bring you closer to your desired return objectives and factor exposures. To do this, simply add a potential investment and compare both portfolios.
Hopefully many of these exercises will come in handy over these next few weeks and throughout the year. Don’t forget that you can export the charts and tables as images, as well as certain underlying analyses to Excel if you ever need. You can also click “Share” at the top of the analysis pages to easily print a report or share the link to the analysis with your colleagues. Let us know how it goes and if there are other workflows we can explain in further detail.
1 Note: These assumptions do not represent Two Sigma's view of the future performance of these indices. We have chosen the assumptions arbitrarily for the purposes of providing you with an example.
*Not available in certain jurisdictions.
This article is not an endorsement by Two Sigma Investor Solutions, LP or any of its affiliates (collectively, “Two Sigma”) of the topics discussed. The views expressed above reflect those of the authors and are not necessarily the views of Two Sigma. This article (i) is only for informational and educational purposes, (ii) is not intended to provide, and should not be relied upon, for investment, accounting, legal or tax advice, and (iii) is not a recommendation as to any portfolio, allocation, strategy or investment. This article is not an offer to sell or the solicitation of an offer to buy any securities or other instruments. This article is current as of the date of issuance (or any earlier date as referenced herein) and is subject to change without notice. The analytics or other services available on Venn change frequently and the content of this article should be expected to become outdated and less accurate over time. Two Sigma has no obligation to update the article nor does Two Sigma make any express or implied warranties or representations as to its completeness or accuracy. This material uses some trademarks owned by entities other than Two Sigma purely for identification and comment as fair nominative use. That use does not imply any association with or endorsement of the other company by Two Sigma, or vice versa. Click here for other important disclaimers and disclosures.