Klarphos SAA tool - Bank Profile

Find your ideal Private Markets allocation

We are excited to announce the latest release of our Strategic Asset Allocation (SAA) Web Tool, now featuring tailored optimisations for European Banks, leveraging leading industry indicators. This new iteration reflects our ongoing commitment to delivering bespoke solutions for institutional investors.

‍

The tool offers a comprehensive range of typical allocations for institutional investors, alongside parameters to define risk appetite and the desired allocation to Private Markets. These investor profiles are based on our extensive client base, where we have analysed common allocation patterns to define target return ranges and portfolio management strategies.

‍

‍

What's new

In recognition of the growing interest in alternative investments, we have integrated a optimisation model based on Standardised Approach (SA) under CRR III. This enhancement is designed to support compliance with regulatory requirements while optimising capital efficiency for banks located in the European Union (EU).

‍

Managing Risk-Weighted Assets (RWA) is a critical concern for Bank Treasuries and Chief Investment Officers (CIOs) because it directly impacts capital requirements and regulatory compliance. This is particularly important as regulatory standards under CRR III, which comes into force in January 2025, have introduced more stringent capital requirements and risk sensitivity measures. By optimising RWA, banks can improve their capital efficiency, reduce the cost of capital, and ensure compliance with evolving regulatory mandates, ultimately supporting their long-term sustainability and competitiveness.

‍

The tool provides detailed outputs for the selected RWA exposure, including key performance and risk metrics such as annualised returns, volatility, Sharpe ratio, VaR (95%, 1-year), maximum drawdown, mean return, allocation to private markets, RWA, and the corresponding portfolio allocation.

‍

In addition to the Return on Risk-Weighted Assets (RoRWA) optimisation, incorporates a Mean-Variance Optimisation (MVO) framework in the same manner as the other client types, addressing the asset side of the balance sheet within a European bank’s treasury portfolio.

‍

These updates empower users to navigate the complexities of modern portfolio management with a balanced approach, combining traditional and leading industry risk measures. This dual framework offers valuable insights into effective portfolio management, ensuring alignment with the industry’s leading metrics for robustness and precision.

‍

RWA Determination: Risk-Weighted Assets (RWA) are determined by evaluating the risk level of each asset class. Under the Capital Requirements Regulation (CRR III), each asset is assigned a specific risk weight based on its risk profile. This helps banks ensure they hold enough capital to cover potential losses. The risk weights vary depending on the type of asset, such as Private Equity, Private Debt, bonds, or equities, and their associated credit risk. The following table shows some sample asset classes including annual returns and risk weights based on the Standardised Approach (SA) under CRR III. Note that for investment into funds (CIU) a Look-Through-Approach is assumed.

‍

‍

^{Notes: For equities, a holding period of more than 3 years is assumed, otherwise the risk weight rises to 400%. We also assume full implementation of CRR III (no transitional period). For Private Debt, no subordinated exposure is assumed. Cash held at IG rated banks.}

‍

Deep dive into methodology

The calculations performed by our SAA tool are based on the mean-variance optimisation model and a return on risk-weighted assets for EU Banks only. The former model is a cornerstone of modern portfolio theory and seeks to balance risk and expected return, maximising the return for a given level of risk.

‍

The term 'marginal benefit' refers to the incremental increase in return or reduction in risk that can be achieved by gradually increasing the proportion of a given asset in the portfolio. Where the specific model for Banks seeks to perform a similar balance among RWA and expected return, maximising the return for a given level of RWA.

‍

In our approach, the optimal portfolio is calculated on an individual basis, taking into account the input parameters chosen by the user. The calculation uses representative industry benchmarks for each asset class, ensuring a realistic and unbiased view of potential portfolio outcomes. This approach ensures that users receive an accurate representation of their potential investment outcomes.

‍

How to use the tool

I. Select a client profile

Investors choose from a range of portfolios typical of institutions and their investment objectives:

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

II. Select your preferences

After selecting the desired type of client, by adjusting the Expected Return Target via the slider, users can navigate along the efficient frontier. Alternatively, changing the target allocation to Private Markets generates a new frontier, helping investors visualise their asset allocation and identify the marginal benefits of including additional illiquid assets in their existing portfolio. European Banks can now design a portfolio based on its RWA contribution, enhancing customisation for user-specific needs by adjusting the Expected Return on RWA slider.

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

Investors can visualise the selected optimal allocation dynamically in real time as their preferences are adjusted. The performance of the selected portfolio can be simultaneously monitored.

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

III. Compare to a Traditional 60/40 Portfolio

Investors can view the expected performance of the selected portfolio and compare it to a traditional 60/40 portfolio. By moving the slider, they can see how the allocation, return and risk profiles of the selected portfolio change. This comparison with the 60/40 portfolio provides a clearer understanding of the impact of their choices. This allows investors to make informed decisions in line with their investment objectives.

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

‍

Click here to access the SAA Tool.

‍

‍

Important Information

This document is informative purposes only. It does not constitute research, investment advice nor solicitation to invest in any investment product or service that Klarphos offers or may offer in the future in any jurisdiction. The information contained herein is based on projections, estimates and/or other financial data and has been prepared internally by Klarphos. Opinions expressed therein are current opinions as of the date of this document only and are subject to change at any time without notice.

No representations are made as to the accuracy of the observations, assumptions, and projections. No subscriptions to any Klarphos products are possible based solely on this document. Any investment decisions should be made in accordance with the legal documentation of a fund such as its offering memorandum.

Klarphos is not entitled to provide any tax, regulatory or legal advice.

Past performance is not indicative of future returns. There can be no assurance that the strategy objectives will be realized or that the strategy will not experience losses. Target returns are hypothetical and are neither guarantees nor predictions of future performance. There can be no assurance that the target returns will be achieved.

‍