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ALM and Asset Allocation Solutions

Asset-Liability Management and Private Wealth Management

EDHEC-Risk Institute has been conducting research into the field of Asset-Liability Management (ALM) and Private Wealth Management (PWM) for a number of years.

Early research discussed the sources of added-value in private wealth management, and argued through a series of illustrations that asset-liability management is the natural approach for the design of truly client-driven services in private banking.

Subsequent work focused on understanding the application of asset-liability management methodology in private wealth management, concentrating on the superiority of the ALM approach, with special attention given to the life cycle asset allocation developed in the academic literature over the past decade. It also examined the shortcomings of current PWM practices, putting them in perspective in relation to best practices for private ALM.

Additional work examined the question of designing life-cycle funds that can allow for the incorporation of a class of private investors’ horizon and objectives, having identified the need for financial innovation to design better target date funds based on stochastic life cycle investing and taking into account the presence of risk factors that impact not only asset returns, but also private investors’ wealth levels.

More recently, research has focused on improving long-term investing strategies for private wealth management through dynamic allocation strategies that exploit the presence of mean-reversion in interest rates, equity Sharpe ratio and equity volatility.


Asset-Liability Management Decisions in Private Banking
February 2007
Noël Amenc, Lionel Martellini, Volker Ziemann

Working from the observation that the contribution of asset-liability management techniques developed for institutional investors is not yet familiar within private banking, this study shows the expected benefits of a transposition of that kind. Asset-liability management represents a genuine means of adding value to private banking that has not been sufficiently explored to date. Within the framework of private financial management offerings, personal wealth managers tend to confine their clients to mandates that are only differentiated through their level of volatility, without the client’s personal wealth constraints and objectives being genuinely taken into account in order to determine the overall strategic asset allocation. In that sense, private wealth management is not sufficiently different from the management of a diversified or profiled mutual fund.

This research was produced with the support of Pictet & Cie.


Reactions to an EDHEC Study on Asset-Liability Management Decisions in Private Wealth Management
October 2008
Noël Amenc, Felix Goltz, David Schröder

This report covers the industry reactions to the earlier EDHEC-Risk study, "Asset-Liability Management Decisions in Private Banking". Its objective was to compare the conclusions drawn by the report with current industry perceptions. The basic question addressed was: what do practitioners think about using asset-liability management in private wealth management?

This research was produced with the support of ORTEC Finance.


Asset-Liability Management in Private Wealth Management
September 2009
Noël Amenc, Lionel Martellini, Vincent Milhau, Volker Ziemann

This study argues that asset-only asset allocation models fail to account for the presence of investment and/or consumption goals and objectives, such as preparing for retirement or acquiring property. It instead provides a formal framework suggesting that asset-liability management can ensure that private wealth managers are able to offer their clients investment programmes and asset allocation advice that truly meet their needs.

An article based on this research was published in the Fall 2009 issue of the Journal of Portfolio Management.

This research was produced with the support of ORTEC Finance.


EDHEC-Risk European Private Wealth Management Survey
November 2010
Noël Amenc, Sergio Focardi, Felix Goltz, David Schröder, Lin Tang

The above research showed that taking an ALM approach to private wealth management has great implications for the design of optimal portfolios. ALM has a direct impact on the selection of asset classes, as it leads to a focus on the liability-hedging properties of asset classes. In a conventional asset-only perspective, after all, the risk-free asset for any investor is cash, whereas in ALM the risk-free asset is not unique. It is the asset that best hedges the future consumption needs of the investor. These insights have great implications for the ways private wealth managers should go about providing solutions to clients. The present survey, which looks into whether private wealth managers actually recognise these implications, draws on responses from 159 private wealth managers in Europe. The key findings of the survey can be summarised along three lines. First, private wealth managers see the relationships they forge with their clients as the principle source of the value they add. But they fail to exploit this close relationship to customise the services they offer their clients: when portfolios are designed for clients, market factors are taken into account more frequently than are the individual characteristics of the clients. Private wealth managers also fail, on the whole, to provide state-of-the-art means of horizon-dependent asset allocation. In fact, when human capital, the time and state dependency of investment opportunities, and other causes of horizon effects are not recognised, one can conclude that horizon-based allocations are approximate rather than optimal. Finally, PWMs see the great potential of taking into account client-specific spending objectives, but only a small minority actually attempts to realise this potential.

An article based on this research was published in the Winter 2009 issue of the Journal of Wealth Management.

This research was produced with the support of ORTEC Finance.


Life-Cycle Investing in Private Wealth Management
October 2011
Romain Deguest, Lionel Martellini, Vincent Milhau

Previous academic research has shown that ALM is the proper framework for analysing private clients’ investment decisions because it allows for the integration of their specific time-horizon, constraints and objectives in the portfolio construction process. While the ideal solution for ultra high-net worth clients and large family offices, such a highly customised approach cannot, however, be implemented for all private investors. In this context, it appears more than appropriate for the asset management industry to work towards the design of life-cycle funds that can allow for the incorporation of a class of private investors’ horizon and objectives. Currently available target-date fund products, mostly oriented towards retail clients, are not a satisfactory answer to the problem because they are based on simplistic allocation schemes leading to a deterministic decrease in equity allocation regardless of market conditions. The present study argues that financial innovation is needed to design better target date funds based on stochastic life cycle investing, taking into account the presence of risk factors that impact not only asset returns, but also private investors’ wealth levels. One key element in private wealth management is the presence of income risk, which has a substantial impact on the optimal asset allocation strategy.

This research was produced with the support of La Française AM.


Long-Term Investing Strategies in Private Wealth Management
July 2012
Noël Amenc, Romain Deguest, Lionel Martellini, Vincent Milhau

This paper argues that improved long-term investing strategies can be designed for private wealth management. These dynamic allocation strategies exploit the presence of mean-reversion in interest rates, equity Sharpe ratio and equity volatility. The resulting asset allocation strategy is based on an industrialisation of three key paradigms that have recently emerged in institutional money management: liability-driven investing (LDI), for taking into account private clients’ consumption objectives, life-cycle investing (LCI), for taking into account private clients’ horizon, and risk-control investing (RCI), for taking into account private clients’ risk budgets. Our Monte Carlo experiments reveal a substantial benefit in terms of utility gains from using improved long-term investing strategies over existing industry standards.