Portfolio Simulation to Meet Client Goals

1© 2016 Windham Capital Management, LLC. All rights reserved.

Confidential. Not for redistribution.

November 2016 1

Portfolio Simulation to Meet

Client Goals

Benjamin EischenWindham Capital Management, LLC

Senior Investment Associate


GOAL OF THIS PRESENTATION

Introduce a rigorous quantitative approach to help managers add value through portfolio simulation


AGENDA

General Purpose

Target Date Funds

Types of Simulation

Capital Market Assumptions

Example

Dynamic Strategy Review

Future considerations


GENERAL PURPOSE

• Design a portfolio that has the highest likelihood of achieving the client’s targeted goal

• Paying for college• Retirement• Gifting• Sustained Spending

• Communicate the investment strategy in a way the client can understand• Build confidence and trust


TARGET DATE FUNDS

• Do not take into account the complete portfolio• Spending and future earnings are disregarded• Minimal or no assumptions about initial conditions or risk/return

expectations


TYPES OF SIMULATION

• Monte Carlo Simulation

– Asset class returns are drawn from a normal distribution defined by their assumed means and covariance matrix.

– Correlations between asset classes are constant throughout the simulation.

• Block Bootstrap Simulation

– Portfolio risk is best predicted by the empirical underlying data

– Does not assume portfolio returns come from a normal distribution

– Blocks of data are chosen to keep in tact any autocorrelation

– Correlations between asset classes are dynamic and change through time (at least as much as we have seen through the historical sample)

– The empirical distribution is rescaled to reflect forecasted returns.


MONTE CARLO VS. BOOTSTRAP


CAPITAL MARKET ASSUMPTIONS

Return- Historical- CAPM- Implied- Blended- Black-Litterman- Views

Risk- Historical- Exponential- Conditioned on turbulence- Filtered


WHY THE EXPECTED RETURN IS NOT TO BE EXPECTED

If you accept history as a guide to the future, at least to the extent that history includes within it the potential investment outcomes of the future, then the following two seemingly paradoxical statements are true:

• The expected future wealth of a sequence of returns drawn randomly from an actual historical sample is greater than the wealth actually produced by those historical returns

• Even if the past truly is representative of the future, the likelihood that your wealth will grow to a sum at least equal to its expected value is less than 50%.

Kritzman, Mark P. (2000) Puzzles of Finance. New York, NY: John Wiley & Sons, Inc.


EXAMPLE: SAVING FOR COLLEGE

- Initial investment of $30,000- Annual contribution of $5,000- Goal of $250,000 in 18 years

Probability of Achieving Target Wealth


EXAMPLE: SAVING FOR COLLEGE


DYNAMIC STRATEGY REVIEW

- Set up recurring review to revisit progress towards goal- Adjust the plan when spending, return environment or past

performance dictate- Dynamically reviewing goals can increase the likelihood of

success up to 10%


FURTHER CONSIDERATIONS

- More complex spending rules- Performance linked- Index Linked- Percent of portfolio value- Constant Growth

- Account for impact of inflation

14© 2016 Windham Capital Management, LLC

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Thursday, November 17th at 11am

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15© 2016 Windham Capital Management, LLC

Disclaimer

The information contained in this presentation (the “Presentation”) is prepared solely for informational purposes. The Presentation is neither an offer

to buy or sell nor a solicitation of an offer to buy or sell any security, or interests or shares in any fund or strategy. Historical data and other

information contained herein is believed to be reliable but no representation is made as to its accuracy or completeness or suitability for any specific

purpose. Past performance is not indicative of future performance, which may vary. There can be no assurance that the strategies’ investment

objectives will be achieved. All strategies in this Presentation place investor capital at risk. Future returns are not guaranteed and a loss of principal

may occur.

References to market or composite indices, benchmarks or other measures of relative market performance over a specified period of time are

provided for your information only. Reference to an index does not imply that the Windham portfolio will achieve returns, volatility or other results

similar to the index. The composition of a benchmark index may not reflect the manner in which a Windham portfolio is constructed in relation to

expected or achieved returns, investment holdings, portfolio guidelines, correlations or tracking error targets, all of which are subject to change over

time.

Prospective investors should not rely on this Presentation in making any investment decisions. Windham’s portfolio risk management includes a

process for managing and monitoring risk, but should not be confused with, and does not imply, low risk. Asset classes and proportional weightings

in Windham portfolios may change at any time without notice. Windham does not provide tax advice to its clients and all investors are urged to

consult with their tax advisors with respect to any potential investment.

Please refer to Windham’s ADV Part 2A for additional information. Windham and its owners disclaim any and all liability relat ing to this Presentation,

including without limitation any express or implied representations or warranties for statements contained in, and omissions from, this information.

Portfolio Simulation to Meet Client Goals

Economy & Finance

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