Asset Allocation Software

Build your own forward looking asset allocation

Efficient Frontier 3.0 integrates the well known Markowitz algorithm to perform portfolio optimizations and draw efficient frontiers (read more about Markowitz efficient frontiers). The greatest difference between this software and tons of other software available worldwide is very simple to explain: all optimizations performed with Efficient Frontier 3.0 are based on provisional figures. The traditional approach makes use of historical data for asset returns, asset volatilities and correlation pairs. Few other software let user enter expected returns. This way you will be able to plot excellent optimizations explaining what happened in the past. But if you want to invest today, you need a forward looking efficient frontier based on forecasted returns, forecasted volatilities and forecasted correlation coefficients.

Long only asset allocations and short market exposure

Today's financial instruments let us take profit from expected market downturns. If we think that the S&P500 index is going to fall by a 5% to 8% in coming weeks, we can take advantage of this view buying an ETF that shorts that market. This is not actually a short position: we don't sell anything and the corresponding cash flow is an outflow, not an inflow. So we are investing our cash into a long position arising a short market exposure. We are long an ETF that shorts the S&P500.

Traditional asset allocation software cannot handle this kind of financial instruments. They may let you have short positions, but they are actual short position that do not consume your cash but, instead, they increase your available cash.

Efficient Frontier 3.0 lets you manage this complicate situation with just one flag: "allow funded short positions". If you flag that checkbox for any market you can go short via exchange traded products, our software will run an optimization including all possible funded short positions (that is to say short exposures consuming cash from your account).

Automatic configuration

Run your custom portfolio optimization effortlessly with a few clicks of the mouse. You only need to choose markets you are interested in. You will be given a list of more than one hundred of international financial markets spanning from equity indexes, bond markets, commodities, real estate, private equity and money markets in several currencies. Just choose those you like and Efficient Frontier will automatically load all relevant expected volatilities, expected returns and forecasted correlation coefficients. Then simply click on a button and let the software work. In a few seconds (or minute, depending on how many markets you have chosen) you will see your customized efficient frontier and navigate all efficient portfolios along the chart. Every single portfolio can be clicked to see its actual composition and, with one more click, you can print a stylish document for your customer with all relevant details (view an example)

Optimization on over 100 international financial markets

Any portfolio optimization makes sense only if intended to look for risk diversification. This looks pretty obvious but it isn't as much trivial. In order to achieve actual risk diversification you need to choose among tens of markets spanning from several asset classes. For each of them you should be given reliable expected returns, forecasted volatilities and forward-looking correlation coefficients. All of them are automatically available within Efficient Frontier 3.0 directly from AdvisingTools' proprietary quant models. These can be used as they are or integrated (or even changed) by user specific forecasts.

Leveraged long or short market exposures

A typical limit of most asset allocation tools is the lack of ability to deal with leveraged positions. Today's listed financial products often let us go long or short with leverages that are tipically in the range 1x to 5x. This is not the traditional financial leverage handled by most optimizer. You don't actually borrow money, you simply buy a product that does it on your behalf. Leverage ETPs make use of derivatives or lending facilities in order to leverage their market exposure. Investing €100 into a 1.5x ETP gives you an actual market exposure of €150 with a capital absorbtion of €100. This can be easily managed by Efficient Frontier 3.0 letting the user set the leverage of instrument to be considered in the optimization. If you're going to consider a 2.5x ETF on Eurostoxx50 index, you should simply enter that value in the leverage field close to that market. Efficient Frontier 3.0 will automatically include all leveraged and unleveraged exposures to that particular market in the optimization process. If it's going to be a leveraged short postion you should simply add a flag to the relevant checkbox "enable funded short positions".

One-click second level portfolio optimizations

Efficient Frontier 3.0 lets you focus your attention on what we call the "main asset allocation". This is the optimization process run at the higher level. You will first consider broader markets like US Equity or Emerging Market Equities or EUR Corporate Bonds; in a second step you should be interested in going into deeper detail looking at market sectors (like consumer staples, industrial goods or whatever) or single countries (like Italy, Germany, Japan or whatever) or specific rating segments (for example only BBB rated bonds).

Efficient Frontier 3.0 lets you focus your attention on this first optimization that is performed at the higher level of broader markets. This will give you the big picture of your customer's asset allocation. Here you'll define expected return and volatility, you'll assess market risks and perform proper suitability analysis.

On a second step you'll be automatically guided in a deep dive into every single market included in your selected asset allocation. After a few question on your preferences, Efficient Frontier 3.0 will automatically perform other optimizations (one for each broader market you have choosen) and pick the sub-allocation with highest sharpe ratio. For example, if your broader allocation includes a 23% of Eurozone Equity Market, you could be interested in further declining this piece of portfolio in different countries within the region or among different industrial sectors. The system will ask you if you want to go in further detail, then it will ask if you want to go through countries or industries and finally will ask you which of available countries or industries you would like to consider. After that it will automatically run an optimization process with all the market you've selected and provide you the best sub-allocation for that 23% to be invested in Eurozone equities.

Deep dive into efficient allocations

Every single point plotted in any efficient frontier is an optimal allocation. That is to say it's the lowest risky possible allocation given that level of expected return. Any other portfolio with same expected return will bear extra risks. You can click each of the points to see a lot of information about that single asset allocation. You can see the weight (quantity in the portfolio) for each market, the position (long or short) and leverage. Obviously you can see its expected return and expected volatility. You can even see where this volatility comes from in terms of asset classes: how much bond markets or equity markets contribute to global portfolio volatility? You can even drill down and see how much every single market contributes to total volatility (more from Equity Japan or Equity Brazil?). You can compute VAR for customized time horizons and level of confidence. You can also calculate shortfall risk (risk not to match a given target of financial return)

Real time suitability analysis

Efficient Frontier comes with a powerful tool for suitability analysis. You can choose up to three different methods to perform suitability:

I - suitability based on portfolio expected volatility
II - suitability based on expected portfolio VAR
III - suitability based on portfolio composition (how many equities? How many bonds? etc.)

You can choose one of them or a combination of them for every single client risk profile. That means that you can use different criteria for different risk profiles. Tipically you could use the third criteria for lowest risk profiles and add volatility constraints for more risky profiles. Efficient Frontier is compleyely preset to perform a typical suitability analysis on seven risk profiles so that you do not need to change anything to start working with good suitability check. But, if you want, you have full controll over the whole suitability process.

Now, let's go to the point. Every time you click on a portfolio in the chart, a full suitability test will be performed and you will see all selected portfolio information (expected return, volatilty, VAR, volatility contribution chart...) togheter with a full suitability report. You will see which profiles this portolio is compliant with, which test have been passed and which have not.

Portfolio averaging feature

Every time you click on a single point of a plotted efficient frontier you can see the weight that each of the markets included in the optimization process has in that particular asset allocation. Moving along the chart you can see that portfolios with similar risk/return profiles have sometimes very different weighs. That's not strange, it is correct and it's due to the expected covariance matrix inner structure. If you don't like to blindly trust a forecasted covariance matrix (remember that nobody has a crystall ball) you are given a powerful tool to smooth these weight's tilts by averaging several point in the same frontier. You can simply right-click all portfolios you want to include in the average and click on "Add to average" in the popup menu.

Efficient Frontier will automatically compute the average of all selected portfolios together with all other metrics that are available for single asset allocations.

Smart asset picking tool

You can consider our Smart Asset-picking Tool like a cherry on the cake. Quickly said, it is a powerful algorithm that helps you searching other markets to include in an optimization process (i.e. building an efficient frontier) in order to maximize global portfolio diversification.

A simple example will give you a good idea of what it does. Let's imagine that you have a prospect client with an investment portfolio mostly concentrated into Euro Govies and investment grade corporate bonds. Based on your experience you know that a good advise should be to include few equities. Not too much, but just that amount capable to capture the diversification effect coming from low bond-to-equity correlation. We know, through our experience, that a 5% to 15% of equity within a 100% single-currency bond portfolio often improves expected retun while reducing portfolio volatility. We also know that we can calculate the exact amount of equity to include (it could be 3% or 14%, who knows?) simply performing a portfolio optimization using Efficient Frontier 3.0. The question is: which of all available equity markets should you include in that optimization process? Your efficient frontier should be built on EUR Gov. Bonds, EUR corporate Bonds and an equity market to pick from a long list of worldwide equity markets. You could narrow your serach to Eurozone equities. You could also make your life easier and choose the Eurozone large cap index. But what about a smart asset picking tool capable to find which of all available Euro based equity markets offer maximum diversification power against the two markets in our prospect client's portfolio? You could discover that the best choice is a specific sector (let's say consumer staples for example) or a particular Country (like France or Italy).

This is what our Smart Asset Picking Tool does. You tell him which markets you want to diversify (Euro govies and corporate bonds in our example) and it will return the full list of available markets sorted by diversification power. The very first market in the list will be the most effective in terms of potential diversification. The last will be the lowest effective. Then, if your focus is in euro-denominated equities, you could easily filter that list by currency (EUR) and by asset class (equity) and you'll get the list of all available euro based equity markets sorted by diversification power. The first in the list is exactly what you were looking for. If you find several good alternatives (and it often will be the case) you can choose the one with higher expected return (that is included in the output results).

Client risk profiling tool

The very first starting points when building an efficient portfolio is a proper assessment of client’s risk appetite and risk capacity. This, together with financial competence valuation is what is known as risk profiling. It’s a unique opportunity to reach at least three key objectives:

- Learning more about your customer
- Make him aware of his actual financial objective and risk appetite
- Better assist him with more targeted advisory

Under a broader context of suitability analysis, client profiling is also extremely important for financial institutions providing investment advice or portfolio management services. All their clients must be assigned a risk profile according to which financial services are to be delivered.

Risk profile attribution needs assessing risk tolerance, risk capacity and competence. It requires a huge number of qualitative information to be cross checked in order to achieve a quantitative measure. This goal can be addressed with a smartly designed questionnaire that should be either as more detailed as possible and the less time consuming as possible (people don't like filling in questionnaires). Efficient Frontier 3.0 comes with a built-in questionnaire capable to balance the two above mentioned opposite needs. It's aimed to measure, as more precisely as possible, your customer's risk tolerance, risk capacity and competence level under four different perspectives:

- Direct questions
- Questions involving client's emotions
- Indirect assessment (based on investment behavior or past experience)
- Simulation of real life examples

Encrypted local client database

Efficient Frontier has also a lot of powerful CRM capabilities. Talking about wealth management and financial advice, an important issue come into play: PRIVACY.
Very often, wealth manager client's information are sensitive data that should be stored securely.
Efficient Frontier lets you save all your customer's data in a local database (not cloud based, but in your own hard disk) in a proprietary format that cannot be red by other software. Also, to prevent, any risk of unauthorized access to client data, all information are encrypted with an encryption key that can be customized by the user.

Advanced and fully customizable suitability analysis

Efficient Frontier 3.0 let you control every single step of the suitability process. It can handle up to seven different risk profiles and let you choose among three different suitability frameworks (VAR-based, volatility-based or asset-allocation-based)

For every single risk profile you can choose which framework to adopt; even a combination of two or three of them. In case of multiple framework selection, you can set the most conservative or the least conservative to prevail.

Within each framework, at risk profile level, you can fine tune and set all thresholds and triggers for suitability assessments.

You can define rules to assign market risk profiles, you can make them adaptive according to client’s domestic currency (foreign exchange exposure bears additional risk) and you can even assign custom risk profiles to any, specific, individual market.

The whole suitability process is flexible enough to match and replicate most of commonly used suitability frameworks.

On the contrary, if you miss a suitability framework you can use the preset features of Efficient Frontier 3.0 and take advantage of its native suitability capabilities.

Custom definitions of market risk profiles

Most advisers, rather than relying on expected portfolio VAR or expected portfolio volatility prefer to perform suitability assessment based on portfolio composition. Depending on how much equity, corporate bonds, high yield or whatever they match portfolios’ riskiness to client's risk profiles.

This approach requires to assign risk category to asset classes and derive portfolio riskiness based on relevant market’s exposure. Each risk profile will have its own limit in terms of maximum acceptable exposure to each mapped market risk.

Efficient Frontier 3.0 can handle the whole process in full detail with several features capable to meet almost all possible requirements.

Maintaining portfolios over time: risk monitor and suitability assessments

What about existing portfolios? As time goes by, markets move and financial forecasts change, it is necessary to ensure that existing portfolios are still efficient as they were when they was built.

Efficient frontier helps you scheduling portfolio reviews and assists you in the whole process.

But there’s more to care about. An investment portfolio that was suitable for a particular client when it was built, could become unsuitable for several reasons: changes on market prices that move assets weights beyond relevant risk profile constraints; increased expected volatilities that changes portfolio risk; new expected correlations reducing actual portfolio diversification…

Efficient Frontier 3.0 helps you with an automatic suitability assessment giving you instant view over actual, real time suitability of any existent client's portfolio.

Also, you can run an automated process that scans all existing portfolios checking if suitability requirements still hold. This same process can also alert in case of specific risks as negative expected return or holding for which our forecasts have turned negative.

Portfolio building tool

As above described, Efficient Frontier lets you build high quality, forward-looking efficient asset allocations. It also let you ensure that those allocations are actually suitable with specific risk profiles for clients that can be adequately profiled with an advanced and reliable built-in questionnaire.

The next step is, obviously, turning an asset allocation into an investable portfolio. Our Portfolio Builder performs exactly this job. It let you change an asset allocation into a list of financial instruments to buy taken out of a universe of more than eleven thousands of investment funds and ETF/ETC.

Also, it can assist you in your daily routine with a couple of powerful tools.

Tool #1: Fund universe

A fund universe is simply a collection of ISINs that you can create and save with a given name. This can be used to reduce the number of funds suggested while building efficient portfolios.

This can be useful in at least 2 circumstances:

1 - If you work for a bank you could have a preset universe of funds to use while building portfolios. This universe can be loaded into Efficient Frontier in order to be used when it comes to build portfolios.
2 - If you are an independent adviser with several clients that hold their assets in different banks, you can build several fund universes according to those available through the banks your customers are working with. This will ensure that every single custom-built portfolio is actually investable by any relevant client.

Tool #2: Preferred instrument lists

As a financial professional you could have your favourite funds or etf for some of commonly used markets. You could have a preference for a particular high yield bond fund, or you could have your favourite ETF as a replica for the S&P5oo index or whatever. You can create one or more “list of favourites” (one for funds, another with ETPs, one other with funds of a particular fund house...) and use them to translate asset allocations into investment portfolios through our portfolio building tool.

Risk profile driven portfolio construction capability

As wealth advisors we know that a well shaped asset allocation is crucial to financial return and risk control. This process is not trivial and must be performed according to relevant client's risk profile. Efficient Frontier 3.0 gives you full support in this fundamental step providing several tools that have been described above in this page.

This is a little bit time consuming and it requires the user to be somewhat experienced with financial markets and, in general, wealth advisory.

The good news is that EF 3.0 makes this work highly scalable. Once you have prepared an asset allocation suitable for a specific risk profile you can save and use it over and over for any client sharing that particular risk profile. For any single customer you’ll be able to choose different fund universes, list of preferred instruments, set base currency and, of course, total portfolio amounts.

That is to say: for every single risk profile (up to seven in EF 3.0) you can have one single asset allocation and many different portfolios one for every single client with that particular risk profile.

Great reporting for enhanced client experience

Top quality advisory and portfolio monitoring are the core of a professional wealth management service, but they are not enough. A good client experience also requires adequate reporting capabilities. This is the reason why Efficient Frontier 3.0 comes with a full set of rich and stylish printable reports for your customers.

A typical client acquisition process involves several steps that can be adequately supported by Efficient Frontier’s reporting capabilities:

Step 1 - Asset allocation report
Let your customer taste your professional approach. This report shows all details of an asset allocation resulting out of a customized optimization process. It includes expected return and volatility, VAR analysis, breakdown by currency, asset classes and geographic exposure and suitability for all client risk profiles. A stylish and complete report that still leave room for a further deep dive into more detailed asset allocation (nurture your prospects).
Example of Asset Allocation Report

Step 2 - Portfolio analysis report
When your prospect is aware of your quantitative and professional approach (see Step 1) he could be keen in giving you his current portfolio in order to have an independent assessment. Portfolio Analyser let you prepare an extremely detailed portfolio analysis for any investment portfolio invested in cash, equities, bonds, Etf and investment funds. This is a 4 page report with highly valuable information and forward looking statements.
Example of Portfolio Analysis Report

Step 3 – Full Asset allocation report
At this final step you’re supposed to have convinced your prospect to be your client. You’ll perform a full asset allocation starting from a “high level” efficient frontier and deep diving into regions, sectors, ratings, curve buckets and whatever with several sub-allocations. At the end of this fully guided and automatically supported process you’ll press a button and get a 6 pages, full asset allocation report.
Example of Full Asset Allocation Report

Step 4 – Portfolio implementation
Using our tool “Portfolio Builder” you’ll be able to tell your customer which products to buy in order to reflect the agreed asset allocation. This report is a recap of everything he has to buy (quantities, ISIN codes, instrument descriptions…) in order to instruct his bank or proceed via online banking. Example of Portfolio Summary Report