Ortec Finance Scenarioset: the result of continuous innovation for over 30 years
Starting from the very first versions of 30 years ago, our economic scenarios are a prime example of continuous innovation. The difference between the first versions of the scenarios and the most recent ones is of course immense. However, our way of working in all these years has not changed: we keep continuously improving and expanding the scenarios based on a mixture of the latest research, the experience of applying the scenarios in practice and the growing and changing demands put on the scenarios by our clients.
600 economic and financial market variables
In the past, the scenarios covered only a few economic variables and asset classes on an annual simulation basis while nowadays this has grown to more than 600 economic and financial market variables (benchmarks) on a monthly simulation basis. In the past, the scenarios were calibrated at most once a year, by one or at most two persons, and based on data collected manually from hard copy reports while nowadays, a team of 10 to 15 specialists produces the scenarios in the first two weeks of every month, based on a multiple of automated data sources and delivered together with extensive documentation. In the past, simple Vector Auto Regressive models were used while nowadays, the models include complex things as filtering techniques, Dynamic Factor Models, stochastic volatility and so forth. In the past, there was one piece of programming code that simulated the scenarios based on flat text file input while nowadays, the software runs on a database, has an interactive interface and uses parallel computing.
However, all these changes are the result of a way of working that in all these years has not changed: one of continuously improving and expanding the scenarios based on a mixture of the latest research, the experience of applying the scenarios in practice and the growing and changing demands put on the scenarios. This always has been, and always will be, a consistent and stable innovation process in which new versions of our scenario methodology always encompass earlier versions, rather than one in which we start off in a completely new direction every now and then.
Over the years, this process has led to many ground-breaking innovations that are now the cornerstone of our Ortec Finance Scenarioset (OFS). At the same time, we have kept working on presenting the output of our complex models in an appealing and intuitive way. A prime example of our efforts in this area is the Ortec Finance Business Cycle Indicator.
Building on a solid foundation
And we continue to improve our offering with new innovations. For example, building on a solid foundation we developed in 2011, we have developed a comprehensive and consistent framework for setting expected long-term means for a broad range of financial and economic variables ranging from real GDP, inflation, nominal and real interest rates and IG and HY credit spreads to equity, real estate, commodities, private equity, infrastructure and hedge funds. Our approach connects leading academic research and techniques and is revised and updated recently and released in January 2018.
And as recent as March 2018, after years of research and development we released a factor-based ALM tool that fully integrates in a consistent manner with our economic scenario framework. Factor-based ALM is a tool developed in close cooperation with two professors that embodies academic findings which have proven a strategic approach to factor-based investing to be beneficial in helping investors create a better risk and return profile.
We are sure it doesn’t end here. Our way of working over the past 30 years that has worked so well will continue to yield many innovations to benefit our clients and support our mission of improving investments decision making.