Asset Allocation & Investment Strategies

Segal Rogerscasey Canada helps clients review the asset allocation structure of their plan to see if the current investment strategy is still appropriate, or if modifications are needed as a result of plan design changes or changes in the capital market environment. We begin this process taking the following steps:

Asset Allocation Structure Review Process

Through the designation of a target asset mix and a target benchmark, we then define the plan's proper asset allocation within an acceptable range of expected risk and return parameters, permissible investment vehicles and management styles.

Our modeling system is based on a forward-looking building-blocks methodology and employs stochastic efficient-frontier modeling. This process takes into account:

  • The asset classes to be considered
  • Estimated risk/return characteristics of each asset class
  • Correlations between the relevant asset classes
  • Limitations on each asset class imposed by the plan's guidelines

Our process allows us to include a variety of asset classes spanning traditional as well as alternative investments.

Asset Allocation Studies

Each asset allocation study is designed to meet the client's specific requirements, taking into account the plan's basic structure, funding status and cash flow requirements. The plan's risk tolerance is also an important factor in determining the appropriate asset allocation. The recommended asset allocation should produce the highest rate of return for a given level of risk.

Our approach incorporates Monte Carlo simulation to allow the plan sponsor to assess the probability of various outcomes under different allocation scenarios. Results may be analyzed in terms of both return and dollar value. If projections of future cash flows are readily available, these can also be incorporated into the model.

We review the plan's current allocation in comparison to alternative portfolios with the goal of enhancing return while limiting or reducing the overall portfolio's risk exposure. The study includes a brief review of the plan's liability characteristics to ensure that plan assets are suitably invested.

Investment Structure Review

We make recommendations regarding the existing investment structure and viable alternatives, focusing on the advantages and disadvantages of each alternative. We focus on fee-efficient structures that have a high probability of achieving the plan's objectives. If an alternative approach is warranted, we will develop a systematic strategy to move the portfolio to the desired structure over time.

Capital Market Assumptions

We utilize a forward-looking approach for modeling expected returns, which reflects, among others, current market data such as real yields, implied inflation expectations, dividend yields, PE ratios and credit spreads.

We begin by developing a term structure of risk-free return based on the current level and shape of the Treasury yield curve. We couple those with various risk premiums to create total expected returns. To develop asset-class risk premiums, we use a Black-Litterman equilibrium model to determine market clearing risk premium relationships. These risk premiums can then be adjusted to reflect any particular views we may have.

Portfolio Analysis and Risk Assessment

Segal Rogerscasey Canada diligently analyzes the progression of our clients’ portfolios through monitoring tools that measure expected risk and return along multiple dimensions. Our Beta Research Group analyzes our clients’ portfolios qualitatively, based on secular themes and quantifiable macro risks. Our portfolio analysis and risk assessment reports are as unique and diverse as the challenges that our clients face in this dynamic and fast-moving environment. We rely on the following qualitative insights and quantitative tools to design, monitor and measure the success of our client programs:

  • Secular themes and macro risks identified by our Beta Research Group
  • Long-term, strategic, forward-looking capital market assumptions from our Beta Research Group
  • Model portfolios from our Beta Research Group
  • @Risk for asset allocation studies
  • Portfolio Accounting Reporting Information System (PARis) from Investment Metrics, LLC
  • Investworks, an investment manager database from Investment Metrics, LLC
  • MSCI’s Barra Aegis for holdings-based ex-post performance attribution and ex-ante risk attribution for global equities

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