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Rethinking Asset Allocation Live Webinar April 6, 2010 2:00 – 3:00 pm EDT
Rethinking Asset Allocation
Live WebinarApril 6, 2010 2:00 – 3:00 pm EDT
Welcome
Asset Allocation In Context
Fundamental Problems
Real World Solutions
IndexUniverse.comExchange-Traded Funds ReportJournal of Indexes
Dave NadigDirector of ResearchIndexUniverse.com
Panel DiscussionDave NadigDirector of ResearchIndexUniverse.com
Sean ClarkChief Investment OfficerClark Capital Management Group
Tom AndersonHead of ETF Strategy and ResearchState Street Global Advisors
Asset Allocation: Act 1
The Brinson, Hood, Beebower Study (1986)
91 Pension Plans In Rearview Mirror
1974-1984
93% Of Variation Explained
Common Misunderstandings
Variability ≠ Returns
PPINGOFR
Shorthanding
Common Misunderstandings
Source: Financial Analysts Journal, May 2010
Rise to Greatness
Dispute falls on deaf ears.
The Tools of Choice
Efficient Frontiers
and
Optimal Model Portfolios
The “Retailing” of Academic Finance
Collect Risk Info
Source: MarketRiders.com
Instant Expert
Source: MarketRiders.com
Advisor In A Box?
Source: MarketRiders.com
Hold On There Partner …
Modern Portfolio Theory Assumes:
Normal Distribution
Serial Correlation
Stable Correlation Matrices
Precision
Typical AssumptionsAsset Class Risk (Std Dev.) Return
Cash 0.8% 3.8%
Bonds (U.S.) 5.0% 4.5%
Large Cap Equity 16.3% 7.8%
Small Cap Equity 21.0% 8.8%
International Equity 16.7% 7.8%
Source: Newport Group via Intuit
Typical BenchmarksAsset Class Benchmark
Cash Current Money Market Rates
Bonds (U.S.) Barcap Aggregate Yield
Large Cap Equity S&P 500 Price (1957)
Small Cap Equity DFA 6-8 Small Cap (1957)
International Equity MSCI EAFE (1970)
Source: Newport Group via Intuit
MPT Mark II
Real World Data is Messy
MPT Mark II
Upside risk = Retirement
Downside risk = Poverty
0
100
200
300
400
500
600
700
800
900
1000
S&P 500, 10 Year Daily Returns
99% of Returns
MPT Mark III?
Black-Litterman:Blisteringly Complex
Risk Budgeting:Often assumes short/leverageDifficult to manage for average investors
What About The Inputs?
The Time Decay of Market Assumptions
Volatility & Returns
Correlations
The New Normal
Volatility
What About The Inputs?
Security S&P 500 MSCI EAFERUSSELL
2000BarCap US
Agg Oil Gold
S&P 500 1
MSCI EAFE 0.599 1
RUSSELL 2000 0.938 0.559 1
BarCap US Agg -0.299 -0.17 -0.298 1
Oil 0.62 0.595 0.561 -0.248 1
Gold 0.311 0.326 0.237 0.017 0.341 1
Daily Correlations, 1 Year Ending 4/1/10
Pre 9/11 Flashback
Daily Correlations, 1 Year Ending 4/1/00
Security S&P 500 MSCI EAFERUSSELL
2000BarCap US
Agg Oil Gold
S&P 500 1
MSCI EAFE 0.181 1
RUSSELL 2000 0.634 0.31 1
BarCap US Agg 0.257 0.03 0.152 1
Oil -0.103 0 0.094 -0.098 1
Gold -0.01 0.033 -0.019 -0.065 0.074 1
The Long View?
Security S&P 500 MSCI EAFERUSSELL
2000BarCap US
Agg Oil Gold
S&P 500 1
MSCI EAFE 0.881 1
RUSSELL 2000 0.879 0.818 1
BarCap US Agg -0.049 0.055 -0.061 1
Oil 0.2 0.302 0.184 -0.039 1
Gold 0.05 0.214 0.058 0.281 0.24 1
Daily Correlations, 10 Years Ending 4/1/10
Taking Back Asset Allocation
Drive the model, don’t let it drive you.
Have an opinion? Use it.
(Remember, tomorrow’s data is really hard to download).
Use All Your Asset Classes
Asset Class ETFs Available
U.S. Equity 308
International Equity 229
Fixed Income 91
Commodity 64
Currency 27
Alternative Strategies 77
Use Cases: Shifting Assumptions …
Use Cases: … Change Everything
Use Cases: That Old Model
Or: Radically Simplify
Equities Bonds T-Bills Commodities
Low GDP, Low CPI 11.4% 10.1% 2.8% -4.4%
High GDP, Low CPI 10.6% 5.2% 1.3% 0.9%
High GDP, High CPI 8.2% -1.2% -0.9% 25.4%
Low GDP, High CPI -1.9% -5.0% -1.7% 3.8%
Source: Barclays Capital Gilt Study
Panel DiscussionDave NadigDirector of ResearchIndexUniverse.com
Sean ClarkChief Investment OfficerClark Capital Management Group
Tom AndersonHead of ETF Strategy and ResearchState Street Global Advisors
Thank You!For more information:
www.spdrs.com… or, Call (866) 787-2257
www.indexuniverse.com
www.ccmg.com
CFP & CIMA Non-ICMA CreditsForms will follow in email in a few days for live webinar attendees.
