Morningstar has added sophisticated asset allocation and forecasting functionality to Morningstar Direct, its investment analysis platform for institutional investors.

Based on its own research and that of its subsidiary Ibbotson, Morningstar’s new tools take into account “fat tailed” returns and measure downside risk.

Mean-variance optimization (MVO) and traditional modern portfolio theory have been the standard for creating efficient asset allocation strategies for more than 50 years, Morningstar said, but these cannot take into account “fat-tailed” or extreme market scenarios. Further, Morningstar said, this framework can only optimize asset mixes for one risk metric (standard deviation) and one reward metric (arithmetic return).

The new asset allocation capabilities allow investors to choose from a number of return distribution assumptions, including traditional bell-curve shaped returns as well as “fat-tailed” and skewed distributions.

“As the markets have shown—and reminded us most harshly again in 2008—real-life finance is often more complex than the traditional mathematical models used for portfolio optimization and forecasting,” said Xianhua Xia, president of institutional software at Morningstar. “Our new asset allocation functionality offers institutional investors a flexible tool to enhance and refine traditional mean variance optimization or take advantage of some of the most cutting-edge modeling.”

Morningstar Direct is used by 5,300 users at 1,700 institutions.



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