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Client Service - Development of an Appropriate Asset Allocation:
According to data published by Roger Ibbotson at the Yale School of Management, Asset Allocation is generally considered responsible for 100% of the level of returns and 90% of the return variability of a given portfolio (Financial Analysts Journal, Jan/Feb 2000, Vol. 56, No. 1). At Gray & Company, we view Asset Allocation as a pro-active process for managing returns. We employ sophisticated modeling techniques to determine efficient asset mixes, return capabilities and characteristics consistent with client objectives and within client constraints.
We deal with asset allocation decisions at two levels - strategic and tactical. Strategic asset allocation represents the best method for controlling risk. Tactical asset allocation provides the opportunity for increasing return.
Strategic asset allocation begins with two questions: How much risk is the fund prepared to accept and which assets are approved for investment? Once the client has provided answers to the above questions we will model different asset mixes for optimum combinations of risk and return. As with most optimization models, there are four primary inputs: expected risk, standard deviation, correlation coefficients and acceptable risk premium.
Standard deviation and correlation coefficients are based on the past five years, a period we selected as most useful for testing a number of different time periods. The client can either determine the risk premium or we will recommend an appropriate level depending on the forecast time horizon. The optimization process leads to a target asset mix for each asset and an allocation range.
We also provide a tactical asset allocation models for clients that seek higher returns. These are run monthly and will provide guidance on shifts between stocks and bonds, value versus growth, and domestic versus international.
During the regular rebalancing periods indicated in the investment policy, we recommend any adjustments we feel necessary in asset allocation, portfolio structure, investment policy and guidelines as changes in the marketplace makes this necessary. We continue to stay abreast of current market trends and look for changes that warrant asset allocation changes and/or investment policy restructuring.
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