Challenging Asset Allocation Promises W. A. Ruch, III, CIMA Chief Executive Officer Sterne Agee...
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Transcript of Challenging Asset Allocation Promises W. A. Ruch, III, CIMA Chief Executive Officer Sterne Agee...
Challenging Asset Allocation Promises
W. A. Ruch, III, CIMAChief Executive Officer
Sterne Agee Asset Management, Inc.Sterne Agee Investment Advisors, Inc.
Trust Company of Sterne Agee
FIRMA-Orlando, FLApril 9, 2008
Universal Investment Quest
Managing Risk for Client
Risk Management = Asset Allocation Modeling
Strategic Asset Allocation
An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon.
At the inception of the portfolio, a "base policy mix" is determined based upon expected returns.
Because the value of assets can change given market conditions, the portfolio constantly needs to be rebalanced to meet the policy.
Diversification Ingredients
Major Classes- stocks, bonds, cash
Style Categories- LCG, MCV, GL, INT, MCG, MCV, SCG, SCV,ITM, LTM, TB, ITF-T, LTF-T, MMF, etc…
Alternative Investments- real estate, energy, basic commodities, currency
Alternative Strategies- equity hedge, event driven, macro, relative value
Investment Program Packaging
SMA – Separately Managed Accounts
UMA – Unified Managed Accounts
MSA – Multi-style Accounts
MSP – Multiple-style Portfolios (Models)
OMS-Overlay Management Strategies
Steps in Asset Allocation Process
Selection Funds & Managers
Rebalancing
Risk Profiling
Model Selection
Investment Proposal Path Risk Tolerance Questionnaire
Investment Proposal Path Alternative to the Questionnaire
Steps in Asset Allocation Process
Risk Profiling
Model Selection
Selection Funds & Managers
Rebalancing
Asset Allocation – Mean Variance Optimizer
Asset Allocation – Model Portfolios (Expected Returns)
Active Manager/Fund Recommendations
Proposed Product Allocation
Active Management vs. Indexed Returns (Back-testing)
Portfolio Analysis Portfolio Index
Total Return Over 5 Years 122.09% 92.37%
Annual Return, Last 5 Years 17.30% 13.98%
Annual Return, Last 3 Years 16.28% 12.99%
Annual Return, Last 1 Year 21.66% 15.88%
Alpha 2.69 0
Beta 1.03 100
Up Market Ratio 117.79 100
Down Market Ratio 7.31 1
Standard Deviation 7.28% 6.73%
Sharpe Ratio 1.95 1.62
Steps in Asset Allocation Process
Risk Profiling
Rebalancing
Selection Funds & Managers
Model Selection
Approved Funds & Managers (Historical Data Judgements)
Due Diligence Process - Schematic
Premier Managers
Traditional Due Diligence
Screening Universe Monitoring
Comprehensive Analysis Committee
Advanced Analytics
Qualitative People
Process
Firm
Operations
Quantitative Performance
Portfolio Stats
Risk Statistics
Peer Groups
Skill Persistency
Due Diligence Committee
Usually comprised of all senior staff and analysts Consider inter-disciplinary group of professionals (sales, admin,
& investments?)
Reviews all new and updated due diligence information including any findings and research updates
Approves all additions and deletions to the Approved List Monitors the “watch lists”
New & problem managers
Base Criteria
Criteria Principal Requirements
Assets Under Management $500 million if in business less than 10 years; $1 billion if in business more than 10 years. Positive asset flow
Years In Business 5 Years
Actual Track Record Must be real assets; simulated results are not acceptable
AIMR Compliant Must be compliant; prefer to also see a CFA on the portfolio management staff
Audited Track Record & Business Financial Statements
Preferred
Investment Professional Turnover for Last Three Years
0% if less than 10 investment professionals; <20% if more than 10 investment professionals
Organization Changes Prefer no changes for the length of the track record; mergers/ acquisitions are evaluated on a case-by-case basis
Registrations/Legal Issues No issues in the last 3 years
Performance 1,3,5, and 10 year Rankings Above median in universe of peers for each period, or able to demonstrate upward trend as a result of new professional staff
Change in investment philosophy or strategy for the term of the track record
No changes during the period measured by the track record
Operational Issues Manager able to participate on platform (availability, fees, minimums)
Timing Strategies or Derivative Investments None
Comprehensive Analysis on Funds & Managers
Traditional analysis addresses Performance relative to the benchmark Performance through market cycles Risk-adjusted performance Performance relative to peers Style consistency
Additional analysis to address Manager skill assessment Propensity to continue to add value
Analysis on new managers results in: Approved Conditionally approved Non-approval
Performance Opportunity Distributions – An Example
Source: PPCA-Inc.
MSCI Barra Performance Analyst – An Example
Acme Management Large Cap Core Strategy – January 2001 to December 2006
ATTRIBUTION REPORT Monthly Cumulative Contr To Total Return
-40
-30
-20
-10
0
10
20
30
40
50
60
70
80
90
AssetSelection
Industries/ Sectors
Market Timing
RiskIndices/ Styles
Total Active
TotalBenchmark
Total Managed
Source: MSCI Barra
DD Committee Manages Information Flow to Financial Institution and Advisors
Firm Level Notification Formal announcement through the Research Update is
made available Depending on the circumstances, the financial institution can
determine the course of action for their particular platform Issues List
Managers reviewed during the quarter Summary of discussions from Due Diligence committee
meetings Actions taken by by the committee during the quarter
Advisor and Firm Level Notification The Research Update is posted online as a bulletin
informing all advisors of the issue and recommended course of action
The bulletin information is also included in future editions of the Manager Profile
Web conferences ?
Findings End Up in Marketing Material
Displayed due diligence information collected by research team
Updated quarterly and posted to the web Last page is for the advisor
Fee schedule, minimums, sales and service policies Important Notes section for relevant information
i.e., Why a manager is on alert or why a manager holds ADRs
Steps in Asset Allocation Process
Risk Profiling
Selection Funds & Managers
Rebalancing
Model Selection
Rebalancing Standards
Manual or systematic process ?
Mandates and constraints ?
Cusips, separate accounts, overlay ?
Frequency ( % or moment in time) ?
Cost ?
Considerations in Setting Up a Cusip Driven Model
The Model or “Rebalancing Target”
From A to B….Transitional Sensitivity
Setting Model Tolerances (% of Holding-Range)
Taxes Matter !!!
Buy/Sell Recommendations Driven by Logical Approach
In Closing…
Questions ?