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Concept

At Winton, we use simulation for a range of purposes, from detailed backtests of individual investment strategies, to portfolio risk management and stress testing. We also make use of stylised toy models to explore the impact of, and interaction between, different statistical assumptions.

Forecasting the performance of an investment portfolio is tantamount to envisaging the range of probable outcomes that could arise from that portfolio. By harnessing the power of Monte Carlo simulation, the Future Tool transforms this complex task into an elegant and interactive data visualisation.
 
The Future Tool allows investors to plug in a forecast Sharpe ratio and correlation for a given number of strategies, funds or markets, along with a target portfolio volatility, and thereby simulate the resulting portfolio’s performance over a time horizon of up to 40 years into the future. 

Many people are familiar with concepts such as the power of diversification, the corrosive impact on long-term portfolio returns of even moderate correlation between strategies or funds, and the fact that the most skilled managers can still go through patches of poor performance. The Future Tool conveys these effects in a visceral way.

Users can adjust key inputs to examine the potential outcomes if their forecasts exceed or fall short of expectations, the influence that changes in these various measures can have on overall returns, and the wide range of portfolio outcomes consistent with the same underlying assumptions of skill and correlation – that is, the role of chance.

Scenarios

Use the Future Tool to explore: 

  • How portfolio returns are affected by changes in: correlation between strategies or funds; expectations of portfolio volatility; the inherent skill of the strategies or funds
  • The impact on long-term returns of adding or removing strategies or investment funds 
  • How it is possible to combine a number of different strategies with modest levels of skill, in order produce an investment portfolio with the potential for compelling long-term results, such as those developed by Winton throughout its 20 years of existence