We believe Risk Budgeting
is a critical element in creating client portfolios. A client's risk
budget is based on the individual's financial goals, ability to handle risk and
overall time horizon. CLS portfolio managers then allocate client accounts by overweighting
strong asset classes while keeping the risk level consistent. Once a risk budget
is assigned, that risk cannot be over-spent, nor can it be underused. Risk Budgeting
manages the level of risk within your portfolio.
The key to risk budgeting lies in the CLS risk continuum. Many investors believe
bonds are less risky than stocks and that all stocks are aggressive, while all bonds
are conservative. However, through our risk budgeting methodology, we understand
that risk actually appears on a continuum with some equities containing less risk
than some bonds, and vice versa. By maintaining a risk budget and making trades
based on both asset class and investor risk, we are able to capitalize on areas
of growth, and underweight asset classes that are underperforming.
Key Points of Risk Budgeting
- Even in the same asset class, some funds are much more volatile than others
- Some bonds can be riskier than some stocks
- The risk level of stocks and bonds varies widely
CLS Portfolio Characteristics:
- CLS portfolios are actively managed
- Not considered market timing or other more aggressive forms of tactical asset allocation
- Portfolio risk is controlled through counterbalancing trades
- Outperformance is sought through overweighting favorable asset classes
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