Asset allocation is the most critical decision facing investors. To ensure our clients have an asset allocation strategy that is positioned to perform in the current market environment and over the long term, we employ both Strategic and Secular scenarios. The Strategic forecast (three to five years) incorporates our proprietary supercycle analysis which identifies differences in asset class characteristics due to economic/demographic trends. The Secular model projects a normalized state for economic, market, and asset class conditions. Efficient frontier analysis solves for the optimal portfolio structure that accounts for both scenarios. DeMarche asset allocation process employs the following methodology: Strategic Inputs We evaluate economic conditions using our strategic forecast (next three to five years), which developed internally by DeMarche’s Asset Allocation Committee. This incorporates our proprietary super-cycle market analysis, which identifies differences in the interaction and performance between asset classes due to changes in underlying economic and demographic trends, such as GDP and earnings growth forecasts; inflation, interest rates, and Fed policy; and demographics, unemployment, and debt. Secular Inputs We evaluate long-term economic conditions for the economy, and we project a normalized state for interest rates, GDP growth, consumer, debt, asset class returns, risk premia, and correlations. Asset Allocation Modeling Asset allocation model inputs include the expected return, standard deviation, and correlation of each asset class and are based on the long-term historical returns and volatility of the various asset classes. Our efficient frontier optimizations are based on our Strategic forecasts, taking into account our current market environment. Thus, the optimal portfolio will be discovered using a shorter time horizon, and its risk and return will be compared with that of the long-term forecast (which is reviewed to consider the longer-term view). We believe that this provides you with a realistic view of risk and return over the strategic horizon, which has implications for your spending policy.
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Xiong, James X., Roger G. Ibbotson, Thomas M. Idzorek, and Peng Chen, 2010. “The Equal Importance of Asset Allocation and Active Management,” Financial Analysts Journal, March/April.