The IskraIndex approach to the model portfolios composition is based on Modern Portfolio Theory, adapted by IskraIndex to account for practical realities and risk management.
A passive investment portfolio is a set of assets, compiled and managed based on clear, pre-established rules without human intervention. The simplest example of a passive portfolio is an index ETF that tracks the changes of a specific market index. In an index portfolio, an investor gains exposure to an entire asset class, thereby limiting the risk of negative specific corporate events affecting any single security within the index to its weight in the index. An asset class is typically understood as a qualitatively similar group of instruments (stocks, bonds, commodities), often divided by geographic criteria into those representing developed and emerging markets.
Index investing allows for the minimization of specific risks associated with individual securities, and the analysis of index probability distributions can centered around the simple and well-known Gaussian (normal) distribution.
For any set of asset classes (ETFs), there exists a combination where the return is maximized for each level of risk. In the Risk/Return dimensions, all such portfolios form the efficient frontier of the portfolio universe. As the image below shows, adding an asset class with higher return and risk to a portfolio can result in a more efficient frontier than one with a smaller set of more conservative instruments.
IskraIndex determines the most suitable model portfolios for conservative, balanced and aggressive risk levels, by calculating and regularly updating the efficient frontier, upon which a set of risk-management constraints are applied.
Investment Universe Definition: We create an investment map comprising the most liquid asset class ETFs available for investment on the New York and London Stock Exchanges.
Asset Class Analysis: We determine the probabilistic characteristics of each asset class based on three parameters: historical return distribution, the average cost of risk, and current monetary conditions.
Trend Assessment & Return Adjustment: Based on the performance of each asset class in recent years, we determine its position relative to a long-term trend and the extent of its deviation from long-term probabilistic characteristics. At this stage, the expected return for each asset class is adjusted upward or downward. This shifts the portfolio construction process from long-term optimization to a significantly more short-term horizon, making the IskraIndex approach adaptive to changing market conditions.
Portfolio Optimization: Portfolio optimization across asset classes is performed based on the adjusted expected returns and historical risks. The result is a set of portfolios that form the efficient frontier for each product line (Deposit+ or Idea) for three risk levels. This optimization is performed monthly.
Dynamic Management & Rebalancing: Over time, the efficient frontier shifts due to changes in the inter-asset correlation matrix, monetary conditions (risk-free rates), and the leading or lagging performance of individual asset classes relative to their trends. We recommend updating a real portfolio at least once a month to ensure it remains optimal. Regular updates are also necessary due to potential changes in an investor's personal circumstances and risk profile, as well as the appearance of new, investable asset classes ETFs. Additionally, as part of Iskra Index's risk management framework, maximum drawdown control may necessitate a swift portfolio shift to a defensive allocation during periods of market stress.
IskraIndex clients with an active subscription to the IskraIndex services have access to their model portfolios via their Personal Account. Furthermore, IskraIndex always sends the client a PDF report via email whenever the portfolio is updated.
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