It is a comprehensive service that focuses on each customer individually. This includes developing an investment strategy based on the client's individual investment objectives, risk tolerance, financial situation, investment horizon and so on. After careful consideration of all the above mentioned criteria, the client is receives an individual investment plan with the most efficient investment strategy to achieve the set goals.
Each month, the client is provided with a report of their chosen investment strategy and has access to professional investment and financial market advice from professional investment managers at all times.
The investment management company Synergy Finance, considering the investor's investment objectives, risk tolerance and financial position, proposes to form the investment portfolio in three components:
The objective of the safe-haven portfolio is to generate a return on investment that is comparable in the long term to the yield of the European aggregated bond basket.
For the sake of maximum diversification efficiency, this part of the portfolio is invested using European stock and corporate bond indexes (ETFs). The favorable situation on the financial markets leaves room for investing in bonds from other regions (non-European) (such as the US), but in any case European bonds must represent at least 50% of the passive yield portfolio.
Targeted allocation of passive yield portfolio (diversified bond basket):
- 20-40% - European sovereign bonds
- 20-40% - European investment grade corporate bonds
- Up to 30% in Emerging Markets (Worldwide)
- Up to 20% European High Yield (speculative rated) corporate bonds
By strategically positioning the bond portfolio in higher yield government and corporate bonds, the average annual return on a passive bond portfolio, depending on the current market situation, is likely to be 1-2% higher than the deposit yield.
Since the probability of an investment-grade issuer becoming insolvent within 5 years is below 1% (Standard & Poor's Global Market Intelligence Report, 2016), and the Emerging Market Bond Index has had no negative 60-month horizon over a nearly 30-year period, part of the portfolio is based on speculative rated bonds, where default in systemic shocks (eg 1990, 2001, 2009) can reach about 10%.
Analyzing 12-month results, the index of the most risky bonds fell by 30% and more during periods of major crises, so the share of this (high-risk) bond in the safe-yield portfolio should not exceed 10-20%.
By allocating the safe-yield portfolio (bond basket) according to the given guidelines and using historical bond index data simulation of the portfolio value change (for the period 2006-2016) we can state that:
- the likelihood that the basket of safe-yield bonds will incur losses over a 60-month period (which has not happened in the last 20 years);
- the probability of loss for any 12-month period is less than 15%;
- the worst 12-month performance was recorded in 2008, when the value of the bond basket was -7.4%;
- in standard market situations, the decline in the bond basket under consideration was below -5%.
Our proposed passive yield position is most effectively accomplished by investing in bond traded funds (ETFs) or the Synergy Finance European Bond Fund.
The main purpose of global tactical asset allocation is to generate a return on investment that is in the long run comparable to that of risky asset classes, but with less volatility and shallower adjustments from the highest value point. This part of the portfolio uses an investment strategy that is modeled and tested over a period of nearly 40 years on the basis of historical data from major asset classes and is capable of generating a positive return on investment over a 5 year period, regardless of the business cycle stage.
This tactical asset allocation concept was described and presented at Lithuanian and international conferences. The doctoral dissertation defended by Lukas Macijauskas was recognized as the best in Lithuania (Economics) and was awarded by the President of the Republic of Lithuania Dalia Grybauskaitė.
Below are the asset classes that make up the portfolio breakdown of the tactical asset allocation and the ETFs that represent them:
US Shares [SPDR S&P 500 ETF Trust, Vanguard Value ETF, Vanguard Small-Cap Value ETF]
Developed Market Equities - Excluding US [Vanguard FTSE Developed Markets ETF]
Emerging Markets Equities [Vanguard FTSE Emerging Markets ETF]
US Bonds [Vanguard Total Bond Market ETF]
US Short Term Bonds [Vanguard Short Term Bond Market ETF]
Raw Materials [iShares S&P GSCI Commodity Indexed Trust]
Gold [SPDR Gold Shares]
Real Estate [Vanguard REIT ETF]
Results of profitability and risk modeling with historical data
Based on the results of simulation modeling with the main asset classes, we have sufficient statistical basis to state that:
Synergy Finance's tactical asset allocation strategy over the long term generates a higher return-to-risk ratio than a basket of major asset classes.
- In almost 60% of cases, the 12-month result of a tactical asset allocation strategy (including management costs) outperforms a basket of equal proportions (excluding taxes). Meanwhile, the depth of portfolio value adjustments over 12-month periods is less than 70%.
- Based on the results of simulation portfolio risk modeling, the probability of loss is less than 30% in 12-month periods, where in both normal market conditions and systemic shocks, value declines were -15%.
- the probability that a tactical asset allocation position will incur a loss for a period of 60 months (which has not happened in the last 30+ years);
The purpose of the high-yield portfolio is to generate a return on investment that, in the long run, would generate a 5-7% better return than deposits.
For maximum diversification efficiency, this part of the portfolio is divided between three strategic directions: private debt, commercial real estate development / lease and investment in alternative energy projects.
Private Debt - Creates a highly diversified portfolio of high-yield loans through targeted companies and crowdfunding platforms:
- Financing types: factoring with insurance, car leasing, working capital with mortgage, RE renovation financing, bridge financing, etc.
- Duration: from a few weeks to 24 months with the orientation to employ the majority of the loan portfolio in niche financing maturities of less than 12 months.
- Geography: higher-income countries (Lithuania, Latvia, Estonia, Poland, etc.);
While the alternative finance sector is relatively young, it is similar in character to small and medium-sized business loans. According to the International Monetary Fund, non-performing loans in this sector reached up to 20% in central and south-eastern Europe during the period of systemic shock (see chart below).
In order to minimize the risk potential of non-performing loans, the alternative finance portfolio is structured in such a way that at least 75% of the investments are allocated to short-term (up to 12 months) loans. Based on multi-criteria model used by Synergy Finance, all investments into private debt is executed with the following targets:
- The maximum short-term fall in value over a 12-month period should not exceed -30%.
- The probability of a loss in any 5-year period is minimal.
Fulfilling an alternative high yield position is most effectively accomplished by investing in a European crowdlending fund and similar investment funds targeting this asset class.
Synergy of Diversification
Using different asset classes in the long term can help you achieve a better overall portfolio return / risk ratio. It is important to note that portfolio formation requires the distribution of assets across as many different asset classes as possible, which are in turn broken down across countries, regions, sectors, value causation, and so on.
Based on research and good practice, it is advisable to make the portfolio as low as possible (ideally negative). y. asset classes or financial instruments that are subject to significant price movements at different stages of the market or economic cycle. The correlations between the investment directions described in the table below.
As can be seen from the table above, the correlation coefficients between Synergy Finance's recommended European bond basket, the tactical asset allocation concept and the high yield portfolio solution using the loan basket are close to zero. This provides a significant statistical basis for claiming that portfolio diversification from these investment themes can achieve a strong diversification effect.