PanAgora Asset Management is incubating the "risk parity plus fund," a new strategy that aims to offer a more diversified approach to investing in stocks and bonds. The new strategy will take a traditional 60/40 portfolio of stocks and bonds and leverage the bond portfolio to evenly spread risk between the two asset classes, CIO Edward Qian said.
The stock portion of the traditional portfolio, split between the Russell 1000 index and the Lehman Aggregate Bond index, had a standard deviation of 15.1% for the 21 years ended Dec. 31, 2004, while the bond portion had a standard deviation of just 4.6%, Mr. Qian noted in a recent white paper outlining the new strategy. Therefore, the stock portfolio would contribute some 90% of the portfolio's total risk, while the bond portfolio would contribute just 7%, according to the paper. PanAgora's new strategy would use leverage to increase its fixed-income holdings. Back-testing found that between 1983 and 2004, the risk parity portfolio could have produced the same return as a traditional 60/40 stock-bond portfolio but with a lower standard deviation and higher Sharpe ratio, according to the paper.
The strategy could be launched before the end of the year, Mr. Qian said. "We're talking to consultants and plan sponsors who are interested in this concept. So far the feedback has been very positive."