ASSET ALLOCATION IS THE MOST CRITICAL DECISION FACING INSTITUTIONAL INVESTORS
Multiple studies have shown that 50% to 90% of portfolio return can be attributed to asset allocation1. To ensure our clients have an asset allocation that is positioned to best perform in the current market environment, we have designed an industry leading asset allocation modeling process. The asset allocation model employs both Strategic (shorter-term) and Secular (longer-term) model inputs. We believe Strategic model inputs provide more appropriate and realistic risk and return assumptions to construct an optimal asset allocation mix for the current economic environment than asset allocation models based solely on long-term history. This unique approach differentiates DeMarche from other consultants and helps clients to craft an investment strategy that will work best in current market conditions and over the long term.
DeMarche asset allocation process employs the following methodology:
Evaluate economic conditions using our strategic forecast (next three to five years) and is 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.
These trends include:
• GDP and earnings growth forecasts
• Inflation, interest rates, and Fed policy
• Demographics, unemployment, and debt
Evaluate long-term economic conditions for the economy. We project a normalized state for interest rates, GDP growth, consumer, debt, asset class returns, risk premiums, and correlations.
For over 25 years, we have developed proprietary Secular inputs for multiple asset classes that have been identified based on length of history and availability of quality data.
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 that has implications for your spending policy.
1 Brinson, Gary P., L. Randolph Hood, and Gilbert L. Beebower, 1986. Determinants of Portfolio Performance. Financial Analysts Journal 42(4):39-48
Ibbotson, Roger G., 2010. “The Importance of Asset Allocation.” Financial Analysts Journal, March/April
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.