Investment fund management method and system with dynamic risk adjusted allocation of assets

• US 5,812,987 A
• Filed: 03/13/1995
• Issued: 09/22/1998
• Est. Priority Date: 08/18/1993
• Status: Expired due to Term

• Current Assignee: BlackRock Institutional Trust Co. NA (Blackrock Incorporated)
• Original Assignee: Barclays Global Investors National Association
• Inventors: Tint, Lawrence G., Luskin, Donald L.
• Primary Examiner(s): LIN, BRYAN T
• Application Number:
  US08/404,190
• Time in Patent Office: 1,289 Days
• Field of Search: 395/236, 395/237, 395/235, 705/36, 705/37, 705/35
• US Class Current: 705/36.00R
• CPC Class Codes: G06Q 40/00 Finance; Insurance; Tax strategies; Processing of corporate or income taxes
• CPC Class Codes: G06Q 40/02 Banking, e.g. interest calculation or account maintenance credit or loans G06Q40/03
• CPC Class Codes: G06Q 40/06 Asset management; Financial planning or analysis

Abstract

An invention for managing assets in one or more investment funds over a specified time. A fund comprises a plurality of assets (e.g., stocks bonds, currencies, gold, silver, oil, gas). A time horizon H_t representing the expected date at which cash will be withdrawn from the fund is associated with each fund. A time L_H represents the length of time remaining between the present time and the horizon time H_t. A risk tolerance, R_I, changes as a function of the decreasing time to horizon L_H. Typically, the risk tolerance decreases as the fund approaches the time horizon H_t (e.g., investments become more conservative toward the end of the life of the fund). A strategic investment mix of assets in the fund is periodically determined as a function of the changing risk, R_I. Investment modifications are accordingly made in the mix of assets in the fund. In one embodiment, a fund also includes a tactical investment strategy component (e.g., representing 25% of the overall investment strategy). The tactical investment strategy is based on the strategic investment mix. Typically, the percent of strategic investments directed to equity-type assets is used to define the percent of tactical investment that is directed to a first tactical investment allocation strategy. The remaining tactical investment amount is directed to a second tactical investment allocation strategy.

Claims

1. A computer system for managing assets in each of a plurality of investment funds, the system comprising:

a processor for executing programmed instructions and for storing and retrieving data;

program memory, coupled to the processor, for storing program instructions for execution by the processor;

an output device, coupled to the processor, for displaying data;

an input device, coupled to the processor, for accepting input data associated with each investment fund for storage in the memory, including;

a time horizon for each investment fund, and

an actual investment mix among the assets in each investment fund; and

an investment program, stored in the memory and executable on the processor, for automatically and periodically;

determining for each investment fund a current risk level for the investment fund as a function of the time horizon and a current date, the current risk level determined by;

##EQU1## where R_I is the current risk level;

L_H is a length of time to the time horizon;

F is a constant risk factor selected for a predetermined maximum amount of risk; and

T₁ and T₂ are times;

determining a risk adjusted asset mix for each investment fund as a function of the current risk level, and

modifying the investment mix of each investment fund as a function of the risk adjusted asset mix.

2. The system of claim 1, wherein the asset mix is a strategic asset mix limited to assets for markets assumed to be in equilibrium, further comprising:

a tactical investment program, stored in the memory and executable on the processor, for;

determining a tactical investment mix for the fund as a function of the strategic asset mix, the tactical investment mix consisting of assets for markets assumed to not be in equilibrium; and

modifying the investment mix of the fund as a function of the tactical investment mix.

3. A computer implemented method for managing assets in an investment fund using a computer comprising a processor, storage, and a memory, the method comprising the steps of:

establishing, via the processor, an investment fund, the investment fund having an actual asset allocation including a plurality of assets, a time horizon defining a maturity date for the investment fund, each asset in the asset allocation being a member of an asset class, each asset class having an asset class weight;

periodically determining, via the processor, a current risk level for the investment fund as a function of the time horizon and a current date, the current risk level determined by;

##EQU2## ##EQU3## where R_I is the current risk level;

L_H is a length of time to the time horizon;

F is a constant risk factor selected for a predetermined maximum amount of risk; and

T₁ and T₂ are times;

periodically determining, via the processor, a risk adjusted asset allocation for the investment fund by determining a current asset weight for each asset class in the asset allocation as a function of the current risk level; and

purchasing or disposing of assets in each asset class of the fund to match the actual asset allocation of the investment fund to the risk adjusted asset allocation of the investment fund.

4. The method of claim 3 wherein the asset classes include equity asset classes and income asset classes, and determining the current risk level further comprises:

determining the current risk level as a function of a risk factor, the risk factor allocating a majority of the assets in the risk adjusted asset allocation to the equity asset classes when the time horizon is greater than a first predetermined amount of time, and allocating a majority of the assets in the risk adjusted asset allocation to the income asset classes when the time horizon is less than a second predetermined amount of time, where the first predetermined amount of time is greater than the second predetermined amount of time.

5. The method of claim 3, wherein the step of periodically determining, via the processor, a risk adjusted asset allocation further comprises:

constraining the asset weight of at least one asset class to being less than a predetermined percentage of a total of the asset weights for all asset classes in risk adjusted asset allocation.

6. The computer-implemented method of claim 3 wherein there are a plurality of investment funds, the method further comprising:

periodically and regularly repeating all steps for each investment fund.

7. The computer-implemented method of claim 3 further comprising the steps of:

allocating a first portion of the actual asset allocation to a strategic investment component limited to asset classes for markets assumed to be in equilibrium;

allocating a second, remaining portion of the actual asset allocation to a tactical investment component limited to asset classes for markets assumed to not be in equilibrium, the tactical investment component having at least an equity asset allocation and an income asset allocation;

determining, via the processor, an adjusted tactical investment allocation within the tactical investment component by;

allocating to the equity asset allocation a first portion of the tactical investment component corresponding to a portion of the strategic investment component allocated to equity asset classes; and

allocating to the income asset allocation a second portion of the tactical investment component corresponding to a portion of the strategic investment component allocated to income asset classes; and

purchasing or disposing of assets in the tactical investment component to match the adjusted tactical investment allocation.

8. The computer-implemented method of claim 7 wherein there are a plurality of investment funds, the method further comprising:

periodically and regularly repeating all steps for each investment fund.

9. The method of claim 7 wherein the asset classes include equity asset classes and income asset classes, and the step of determining the current risk level further comprises:

determining the current risk level as a function of a risk factor, the risk factor allocating a majority of the assets in the strategic investment component to the equity asset classes when the time horizon is greater than a first predetermined amount of time, and allocating a majority of the assets in the strategic investment component to the income asset classes when the time horizon is less than a second predetermined amount of time, where the first predetermined amount of time is greater than the second predetermined amount of time.

10. The computer-implemented method of claim 7 wherein the step of determining a tactical investment allocation comprises:

allocating E percent of the assets of the tactical investment component to the equity asset allocation, where E is equal to a percent of the strategic asset allocation allocated to equity asset classes; and

allocating (1-E) percent of the assets of the tactical investment component to the income asset allocation.

11. The computer-implemented method of claim 3 further comprising the steps of:

distributing a second, remaining portion of the assets to a tactical investment component limited to asset classes for markets assumed to not be in equilibrium, the tactical investment component having at least an equity asset allocation and an income asset allocation;

determining, via the processor, an adjusted tactical investment allocation for the fund by;

allocating to the equity asset allocation E percent of the tactical investment component corresponding to a percent of the strategic investment component allocated to equity asset classes; and

allocating to the income asset allocation (1-E) percent of the tactical investment component to the income asset allocation;

modifying, via the processor, the investment mix of the fund as a function of the tactical investment mix; and

purchasing or disposing of assets in the tactical investment component to match the adjusted tactical investment allocation.

12. A computer implemented method for managing a plurality of investment funds, each investment fund having a time horizon defining a maturity of the investment fund, and an actual investment allocation of the assets in the investment fund, the method comprising:

automatically and periodically determining for each investment fund a risk level for the investment fund as a function of its time horizon and a current date, the risk level determined by;

##EQU4## ##EQU5## where R_I is the risk level;

L_H is a length of time to the time horizon;

F is a constant risk factor selected for a predetermined maximum amount of risk; and

T₁ and T₂ are times;

automatically and periodically computing a risk adjusted asset allocation for the assets of each investment fund as a function of the risk level; and

modifying the actual investment allocation of each investment fund to match the risk adjusted asset allocation for the investment fund.

13. The method of claim 12, wherein the step of automatically and periodically computing a risk adjusted asset allocation for each investment fund further comprises:

automatically and periodically computing a strategic asset allocation for each investment fund as a function of the risk level, the strategic asset allocation consisting of a first type of assets of the actual investment allocation in markets assumed to be in equilibrium;

automatically and periodically determining a tactical investment allocation for each investment fund as a function of the strategic asset allocation, the tactical investment allocation consisting of a second type of assets in the actual investment allocation in markets assumed to not be in equilibrium; and

modifying the actual investment allocation, of the fund by purchasing or disposing of first type assets to match the strategic investment allocation and purchasing or disposing of second type assets to match the tactical investment allocation.

14. The method of claim 13, further comprising:

determining the risk level as a function of a risk factor, the risk factor causing the strategic investment allocation to allocate a majority of the assets to the equity asset classes when the time horizon is greater than a first predetermined amount of time, and causing the strategic investment allocation to allocate a majority of the assets to the income asset classes when the time horizon is less than a second predetermined amount of time.

15. In a computer system, including a processor and a memory, an investment program stored in the memory and executable by the processor for managing assets in each of a plurality of investment funds stored in the system, the investment program comprising:

an investment program that accepts a time horizon for each investment fund and an actual investment allocation among the assets in each investment fund, and that automatically and periodically;

determines for each investment fund a risk level for the investment fund as a function of the time horizon and a current date the risk level determined by;

##EQU6## where R_I is the risk level;

L_H is a length of time to the time horizon;

F is a constant risk factor selected for a predetermined maximum amount of risk; and

T₁ and T₂ are times;

determines a risk adjusted asset allocation for each investment fund as a function of the risk level; and

modifies the actual investment allocation of each investment fund to match the risk adjusted asset allocation.

16. A computer implemented method for managing an investment fund having a time horizon defining a maturity of the investment fund, and an actual investment allocation of the assets in the investment fund, the method comprising:

automatically and periodically determining a risk level for the investment fund as a function of the time horizon and a current date, the risk level determined by;

##EQU7## where R_I is the risk level;

L_H is a length of time to the time horizon;

F is a constant risk factor selected for a predetermined maximum amount of risk; and

T₁ and T₂ are times;

automatically and periodically computing a risk adjusted asset allocation for the assets of the investment fund as a function of the risk level; and

modifying the actual investment allocation of the investment fund to match the risk adjusted asset allocation for the investment fund.