Institutional investors face serious challenges due to the current low interest rate environment and their payment obligations. Life insurance companies in Germany have invested the majority of their assets in fixed-income securities. Thus, asset managers struggle to earn adequate returns as a consequence of low yields of high-grade sovereign bonds. As a consequence, institutional investors are forced to rethink their asset allocation, which is vital for the investment success.
This thesis aims to evaluate asset allocation strategies in the light of the low interest rate environment that enable investors to generate adequate risk-adjusted returns. A sample portfolio is developed that is broadly diversified, has exposure to alternative investments and applies the Risk Parity ap-proach. The performance is evaluated over different evaluation periods on a risk-adjusted basis and in comparison to other asset allocation strategies. As a result, the sample portfolio outper-forms the current asset allocation of German life insurers and naïve diversification. However, portfolios with significant exposure to private equity or stocks outperform the sample portfolio in terms of Sharpe ratio but require a higher risk tolerance. Nevertheless, the sample portfolio achieves a satisfactory risk and return profile and is well balanced in terms of risk contribution.
Table of Contents
- Introduction
- Theoretical Background of Modern Portfolio Theory
- Relation Between Risk and Return
- Diversification & Efficient Frontier
- The Mean-Variance Portfolio as an Optimum?
- Efficient Market Hypothesis
- Extensions of Modern Portfolio Theory
- Critical Evaluation of Modern Portfolio Theory & Capital Market Theory
- Low Interest Rate Environment and the Implications on Institutional Asset Management
- Overview of Asset Management
- Causes and Implications of the Low Interest Rate Environment
- Status Quo of Institutional Asset Management
- German insurance companies
- U.S. Endowment funds
- Selected Investment Approaches
- Active vs. Passive
- Core-Satellite-investing
- Risk Parity approach
- Do Alternative Assets Improve Asset Allocation of Institutional Investors?
- Development of a Sample Portfolio for an Institutional Investor
- Practical Implementation of the Sample Portfolio
- Investment Summary
- Objectives and Limitations
- Investment Selection and Benchmarks
- Asset Allocation & Portfolio Construction with SmartFolio
- Portfolio Management with Netfolio
- Performance Evaluation
- Overview of Performance Evaluation
- Key Figure-based Analysis
- Risk-Return Profile
- Risk and Return Ratios
- Performance Analysis in the light of the Development on Capital Markets
- Backtesting the Performance
- Overall Ranking of the Performance
- Critical Evaluation of the Sample Portfolio Implementation and the Methodology
- Practical Implementation of the Sample Portfolio
Objectives and Key Themes
This master's thesis aims to analyze asset allocation strategies within the context of the current low-interest-rate environment, specifically from the perspective of institutional investors. It seeks to develop a practical approach to portfolio construction and management under these challenging conditions.
- Asset allocation strategies in a low-interest-rate environment
- Modern portfolio theory and its limitations
- The impact of low interest rates on institutional investors
- Practical application of portfolio construction and management tools
- Performance evaluation of different asset allocation strategies
Chapter Summaries
Introduction: This chapter introduces the background and problem statement of the thesis, highlighting the challenges faced by institutional investors in the current low-interest-rate environment. It establishes the purpose and scope of the research, outlining the objectives and methodology employed throughout the study. The introduction sets the stage for the subsequent chapters, providing a clear framework for understanding the complexities of asset allocation in the current market conditions.
Theoretical Background of Modern Portfolio Theory: This chapter delves into the fundamental principles of Modern Portfolio Theory (MPT), exploring the relationship between risk and return, diversification strategies, and the concept of the efficient frontier. It examines the mean-variance optimization approach and the Efficient Market Hypothesis, alongside extensions of MPT and a critical evaluation of its applicability in the contemporary investment landscape. The chapter provides a robust theoretical foundation for the practical analysis conducted in later chapters. Key concepts like diversification and risk-return trade-offs are thoroughly explored, establishing the theoretical framework for the subsequent empirical analysis of portfolio construction.
Low Interest Rate Environment and the Implications on Institutional Asset Management: This chapter provides a comprehensive overview of the low-interest-rate environment, analyzing its causes and its significant implications for institutional asset management. It investigates the status quo of asset management practices among different types of institutional investors, such as German insurance companies and U.S. endowment funds. The chapter further explores various investment approaches, including active versus passive management, core-satellite investing, and risk parity approaches, and discusses the role of alternative assets in optimizing institutional portfolios. The chapter establishes the context for the development and evaluation of the sample portfolio in the following chapter.
Development of a Sample Portfolio for an Institutional Investor: This chapter details the practical implementation of a sample portfolio designed for an institutional investor. It outlines the investment objectives, constraints, and the selection of assets and benchmarks. The chapter provides a detailed description of the portfolio construction process using specialized software (SmartFolio and Netfolio), illustrating the steps taken to build and manage the portfolio. The chapter extensively describes the performance evaluation methods employed, including key figure-based analysis and the analysis of portfolio performance in relation to capital market developments. A critical evaluation of the sample portfolio and the methodology concludes the chapter, acknowledging limitations and offering insights for future research.
Keywords
Asset allocation, low interest rates, institutional investors, modern portfolio theory, diversification, risk management, portfolio construction, performance evaluation, active vs. passive management, alternative assets, SmartFolio, Netfolio.
Frequently Asked Questions: Master's Thesis on Asset Allocation Strategies in a Low-Interest-Rate Environment
What is the main topic of this master's thesis?
This thesis analyzes asset allocation strategies for institutional investors in the current low-interest-rate environment. It focuses on developing a practical approach to portfolio construction and management under these challenging conditions.
What are the key themes explored in the thesis?
Key themes include asset allocation strategies in a low-interest-rate environment; modern portfolio theory and its limitations; the impact of low interest rates on institutional investors; practical application of portfolio construction and management tools; and performance evaluation of different asset allocation strategies.
What theoretical framework does the thesis utilize?
The thesis utilizes Modern Portfolio Theory (MPT) as its primary theoretical framework. It explores the relationship between risk and return, diversification strategies, the efficient frontier, mean-variance optimization, and the Efficient Market Hypothesis. The thesis also critically evaluates the limitations of MPT in the current context.
How does the thesis address the low-interest-rate environment?
The thesis examines the causes and implications of the low-interest-rate environment on institutional asset management, specifically for German insurance companies and U.S. endowment funds. It explores various investment approaches, including active vs. passive management, core-satellite investing, and risk parity, and considers the role of alternative assets.
What is the practical component of the thesis?
The thesis develops a sample portfolio for an institutional investor. This involves outlining investment objectives, selecting assets and benchmarks, constructing the portfolio using SmartFolio and Netfolio software, and performing a comprehensive performance evaluation using key figure-based analysis and backtesting.
What methods are used for portfolio construction and performance evaluation?
Portfolio construction utilizes SmartFolio and Netfolio software. Performance evaluation includes key figure-based analysis (risk-return profile, risk and return ratios), analysis relative to capital market developments, and backtesting. The methodology is critically evaluated in the thesis.
What are the limitations of the thesis?
The thesis acknowledges limitations inherent in the sample portfolio and the methodology employed. These limitations are discussed in the critical evaluation section of the thesis.
What are the key findings or conclusions of the thesis?
The specific findings and conclusions regarding optimal asset allocation strategies for institutional investors in a low-interest-rate environment are detailed in the thesis's final chapters. The thesis provides practical recommendations based on the developed sample portfolio and its performance evaluation.
What software is used in the thesis?
The thesis utilizes SmartFolio and Netfolio software for portfolio construction and management.
What are the keywords associated with this thesis?
Asset allocation, low interest rates, institutional investors, modern portfolio theory, diversification, risk management, portfolio construction, performance evaluation, active vs. passive management, alternative assets, SmartFolio, Netfolio.
- Quote paper
- Benjamin Güttler (Author), 2015, Asset allocation strategies in the current low interest rate environment, Munich, GRIN Verlag, https://www.grin.com/document/335117
