Asset Allocation Studies

Asset allocation is an integral part of any full service consulting relationship. While various methods and approaches to asset allocation are common, the effectiveness of a given method is dependent on the inputs used. Asset allocation is, quite simply, as much art as it is science. The results of using a quantitative model are extremely sensitive to the projections on which the model relies. Some of the key considerations which Equitas Capital Advisors employs in our process are:

  • Determining the Fund’s liabilities
  • Determining cash flow patterns
  • Determining the optimal mix of asset classes
  • Defining tolerance for risk
  • Establishing expected rates of return
  • Factoring in liquidity requirements
  • Accounting for key constraints

The process begins with a comprehensive assessment of the Fund’s objectives, preferences and constraints. At this point we blend the Fund’s cash flow needs, actuarial functions, liquidity concerns, regulatory constraints, risk tolerances and the funding status into a comprehensive decision matrix in which an asset allocation strategy can be developed. The final results become part of the Fund’s Investment Policy Statement.

Equitas Capital Advisors uses the Ibbotson methodology for asset class assumptions, including the Nobel Prize winning capital assets pricing model (CAPM) and Black-Litterman methodology. Our asset allocation modeling capabilities are unique in that we have specialized expertise in capital markets, mathematics, and simulation. We have long and varied experience with Monte Carlo analysis for assets and liabilities including consideration of market consistency as well as real-world scenarios, and the necessary interrelationships of factors in such an approach. In the investment arena, this expertise has translated to our evolution beyond a basic static Markowitz efficient frontier method to one that incorporates Monte Carlo modeling to address such issues as forecast uncertainty. The results of an asset allocation study enable us to understand the future financial profile of the client under a particular set of assumptions (asset classes and constraints). Varying any of the assumptions leads to a variation in the results, the nature and magnitude of which help us to understand the sensitivity of the client to certain economic environments. In this way, the future needs of the client can be understood under a variety of circumstances, and the optimal solution to the client’s situation can be sought.

Equitas Capital Advisors offers state-of-the-art asset allocation modeling and risk budgeting capabilities. Our asset allocation analyses quantify the potential financial impact on the portfolio and are tailored to our clients’ specific circumstances and financial objectives. We believe that the overall risk tolerance is of paramount importance in developing an investment policy. We seek to identify the appropriate level of risk to be taken and the optimal blend of risks to achieve our clients’ specific objectives. Through a comprehensive risk budgeting analysis, we can also address asset allocation (beta) and portfolio structure (alpha) risk/return together to develop more financially efficient portfolios than might be otherwise attained if they were addressed separately.

The theory and practice of developing asset allocation assumptions changes over time. Equitas Capital Advisors has been working on incorporating new assumptions and methodologies into its repertoire.

Past performance is no guarantee of future results. Risk and return are measured by standard deviation and arithmetic mean, respectively. This graphic is for illustrative purposes only and not indicative of any specific investment. An investment cannot be made directly in an index.