Download Steps in Asset Allocation Process

Challenging Asset Allocation Promises
W. A. Ruch, III, CIMA
Chief Executive Officer
Sterne Agee Asset Management, Inc.
Sterne Agee Investment Advisors, Inc.
Trust Company of Sterne Agee
FIRMA-Orlando, FL
April 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
Risk Profiling
Model Selection
Selection Funds & Managers
Rebalancing
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
Annual Return, Last 3 Years
Annual Return, Last 1 Year
17.30%
16.28%
21.66%
13.98%
12.99%
15.88%
Alpha
2.69
0
Beta
1.03
100
117.79
100
Down Market Ratio
7.31
1
Standard Deviation
7.28%
6.73%
1.95
1.62
Up Market Ratio
Sharpe Ratio
Steps in Asset Allocation Process
Risk Profiling
Model Selection
Selection Funds & Managers
Rebalancing
Approved Funds & Managers (Historical Data Judgements)
Due Diligence Process - Schematic
Premier
Managers
Quantitative
Qualitative
Advanced
Analytics
 People
 Process
Skill
 Performance
Persistency
 Portfolio Stats
 Firm
 Risk Statistics
 Operations
 Peer Groups
Traditional Due Diligence
Screening Universe
Comprehensive Analysis
Monitoring
Committee
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
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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
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
Model Selection
Selection Funds & Managers
Rebalancing
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 ?