We believe that investors should use forward-looking factors and indicators instead of statistical analysis of time series when making investment decisions. Many asset allocation decisions are based on models that use historic time series. History has proven that these models often underestimate risks. A crisis is often marked as a regime shift that cannot be predicted. After this regime shift, the parameters of the model are adjusted.

The issue is that these models are all based on historic time series and often lack the relevant information that is currently available in the market. Moreover, these models are based on the idea that risk is one dimensional (volatility). This implies that investments that show a steady increase in price are not that risky. However, the financial crises have shown us that this is not always the case. The two main risk factors are the fundamentals and valuation and risks occur when the market is wrong about the fundamental risks of an investment.

The products and services that we offer are based on the fundamental risks of assets. These risks are the factors that drive valuation in the long run, benefiting from short term deviation of the market value from the real value. Some examples of fundamental risk factors are: monetary stability, fiscal strength, economic strength, institutional strength, sustainability, event risk, etc.

Now that we know the fundamental risk, we can determine the revaluation risk. By calculating the difference between the expected loss, based on the fundamental risk factors, and the real return on the corresponding asset, we can calculate how much of the risk has already been priced by the market.

Applying this principles to strategic and tactical asset allocation can be a huge benefit to investors. By focusing on the fundamental factors, one can obtain a better understanding of the financial risks of (potential) investments. This, of course, does not mean that risks can be eliminated completely, but they can be significantly reduced.