Designing and Implementing Welfare-Improving Investment Solutions for Institutions and Individuals

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Presentation of the Partner

FirstRand Limited is a portfolio of integrated financial services businesses operating in South Africa, certain markets in sub-Saharan Africa and in the UK. Many of these businesses are leaders in their respective segments and markets, and offer a universal set of transactional, lending, investment and insurance products and services.

FirstRand is listed on the Johannesburg Stock Exchange (JSE) and the Namibian Stock Exchange (NSX) and is the largest financial institution by market capitalisation in Africa.

Recognised for its culture of entrepreneurship and innovation the group has a long track record of consistent growth in high quality earnings, and superior and sustainable returns for shareholders. This track record has been achieved through a combination of organic growth, acquisitions and the creation of completely new businesses.


Presentation of the Partnership


EDHEC-Risk Institute and FirstRand Limited (FirstRand or the group) are partnering for the first time to launch a three-year research chair entitled “Designing and Implementing Welfare-Improving Investment Solutions for Institutions and Individuals” to expand the scientific literature on investor welfare-enhancing methodologies for portfolio construction in a goals-based investing framework.

Year 1 will focus on a detailed analysis of the interplay between diversification and insurance, with the aim of determining whether it is possible to achieve an improvement in investor welfare by creating a diversified portfolio of insured assets, as opposed to insuring a portfolio of diversified assets.

To answer this problem, in collaboration with the FirstRand team, EDHEC-Risk Institute will develop a comprehensive analysis of various forms of diversification strategies and various non-linear payoffs so as to measure the level of investor welfare achieved with two competing approaches as applied to different markets (equity, fixed-income, currencies, etc.). The two competing approaches are: 

Designing a well-diversified portfolio of individual assets and then generating a convex payoff aimed at maximising investor welfare;
Generating a convex payoff from individual assets and mixing these non-linear asset and factor exposures in a diversified portfolio in order to maximize investor welfare.

The research chair will involve a team led by Prof. Lionel Martellini, Director of EDHEC-Risk Institute, with Vincent Milhau, Scientific Director. Albert de Wet from FirstRand Group Treasury, along with Hannes du Plessis from the group’s Rand Merchant Bank Global Markets Division, will lead a team from across the group’s business to participate in the working committee of the research chair.


Research Outputs:


Measuring and Managing the Opportunity Cost of Downside Risk Protections

November 2021
Nicole Beevers, Hannes Du Plessis, Lionel Martellini and Vincent Milhau

This article studies the implications of the choice of the underlying asset on the frequency and magnitude of floor breaches and on the loss of performance associated with the protection against downside risk; it considers in particular the use of a diversified portfolio of stocks as opposed to a single stock. The authors find that gap risk is more prominent when insurance is applied to a stock than to a portfolio, but it can be reduced by implementing time-invariant portfolio protection or by letting the multiplier decrease when volatility rises. However, option-based insurance with dynamic option replication has a large probability of breaching, no matter the underlying asset. Among diversified portfolios, minimum variance portfolios minimize the opportunity cost of insurance, but the ranking of diversified portfolios in terms of long-term returns does not appear to be disturbed by insurance..