01.17.2014
By Terry Flanagan

Nobel Foundation Prizes Portfolio Management

The Nobel Foundation has adopted MathWorks’ MATLAB to support the asset-liability management strategies of its $500 million (3.3 billion kronor) portfolio and meet its long-term goal of providing monetary awards to future Laureates.

Through the use of MATLAB, The Nobel Foundation will build and implement a risk scenario and asset return simulation engine for its fund, likely targeting a 30-year outlook and potentially increasing to 100 years as the model architecture develops.

The Nobel Foundation wants a clear perspective on its long-term cash flows and risk sensitivities, helping define solvency-oriented countermeasure actions in the case of unexpected tail events like the banking collapses of 2008.

“The Nobel Foundation wants to know how its assets will perform over time, so we can pay out to support the awards while giving visibility around costs,” said Gustav Karner, chief investment officer at The Nobel Foundation. “Our costs are relatively fixed, but we were unsure how our asset portfolio – equities, property, hedge fund investments, and fixed income – will evolve over time. We will use MATLAB to help us understand the risks our portfolio faces and build a flexible simulation engine for medium and long-term asset performance projections.”

The Nobel Foundation’s models built using MATLAB will use Monte Carlo simulation methods to analyze, model and project estimated asset returns, key correlations, and standard deviations, with particular focus on the 2.5% worst- and best-case performance scenarios. The foundation’s fund targets 3.5% returns plus inflation for the aggregated portfolio in the medium term, but benchmarking and assessing returns performance vary by asset class and time horizon.

“We are excited that The Nobel Foundation has chosen MATLAB to help with its long-term financial planning goals,” said Steve Wilcockson, financial services industry manager, MathWorks. “Our mission at MathWorks is to accelerate the pace of engineering and science. The Nobel Foundation directly supports that mission with The Nobel Prize being the ultimate recognition for innovators in these fields. We are honored to be associated with this world renowned organization.”

Separately, the Basel Committee on Banking Supervision has published its second report on the regulatory consistency of risk-weighted assets (RWAs) for market risk in the trading book. This study is a part of its wider Regulatory Consistency Assessment Programme (RCAP), which is intended to ensure consistent implementation of the Basel III framework.

The report, which follows up on an initial study conducted by the Committee that was published in January 2013, extended that earlier analysis to more representative and complex trading positions. Consistent with the findings in the first report, the results show significant variation in the outputs of market risk internal models used to calculate regulatory capital. In addition, the results show that variability typically increases for more complex trading positions.

The analysis confirms that differences in modelling choices are the most significant drivers of variation in market risk RWAs across banks. The analysis supports the type of policy recommendations that were identified in the earlier report to reduce the level of variability in market risk RWAs.

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