Market cap-weighted indices are NOT efficiently constructed
A market cap-weighted index is not an efficient portfolio. Individual investments are weighted according to size: stocks according to market value (market capitalisation) and bonds according to debt (issuance volume). Size-weighted methods make no reference to return and risk. Scientific studies also show: the index lies clearly below the efficient frontier, on which optimal portfolios lie. The index does not have an optimal return-risk ratio (Sharpe ratio). Conclusion: There are more efficient portfolios with less risk and more return.
Efficient Investing with the OLZ minimum variance portfolio
The idea behind the OLZ investment philosophy is to improve the portfolio composition within an asset class. The optimal weighting of individual investments is determined on the basis of predicted risk parameters (volatilities, correlations). In the process, OLZ takes into account the latest findings in financial market research. Systematic optimisation of a portfolio improves its diversification and efficiency (less risk, higher return).
The goal is the ex-ante minimum variance portfolio with the following advantages:
Less risk thanks to optimised diversification
The ex-ante minimum variance portfolio lies closer to the efficient frontier and has a better return-risk ratio (Sharpe ratio) than the index. Optimised diversification provides a lower portfolio volatility and significantly lower losses in the course of market corrections.
Higher return due to the low volatility premium
Empirical financial market studies confirm that stocks with lower price fluctuations (volatility) achieve above average returns. The low volatility premium has been documented for over 40 years. It can be optimally implemented using the minimum variance portfolio because correlations between individual investments are also taken into consideration.
Minimum variance portfolios can be estimated
The minimum variance portfolio is the only portfolio on the efficient frontier dependent only on risk parameters which can be modelled and predicted over time with econometric methods. Return estimates are not required.
OLZ takes into account environmental, social and governance (ESG) criteria in the investment process. Companies which do not meet the following ESG criteria are thus excluded from the investment universe:
- Recommendations for exclusion from the Swiss Association for Responsible Investments (SVVK-ASIR)
- Companies which do not meet UN Global Compact criteria
- Companies which have received the lowest ESG-rating «CCC» from MSCI
- Companies with a «red flag» on the MSCI Controversies list
Further, sustainability ratings are also taken into account at overall portfolio level. Thus, OLZ funds have a minimum rating of «A».