Research on Asset Allocation Strategies

Our central repository of Asset Allocation Research provides Institutional Investors with a single hub where papers on strategic and tactical asset allocation, asset allocation policy, asset allocation techniques and asset allocation models can be easily identified and accessed free of charge.

Strategic Asset Allocation is the name given to the long-term structural asset allocation; the benchmark asset allocation deemed to be appropriate to the long-term goals of the investor. Within a DB pension fund context, for example, this will be framed based on the liabilities of the pension scheme or plan, the relationship between the assets and liabilities, and the sponsors level of risk tolerance. When selecting a Strategic Asset Allocation benchmark, it is normal to specified permitted ranges, within which the manager may deviate from the benchmark. It is important that the ranges, and the benchmark indexes selected for each asset class are consistent with the objectives of the owner.

Tactical Asset Allocation is the name given to the quest to add value (alpha) through timely adjustments to the asset mix. There are a variety of different approaches taken by TAA managers. Some asset allocators will follow a quant model – for instance following a momentum strategy, implemented via index futures. Others might focus on a longer-term, value approach, for instance using an equity valuation model, perhaps built around the Shiller PE Ratio or some other measure of value.

These asset allocation white papers will be written by quants, academics, asset managers, and investment consultants and will be of particular interest to pension fund directors, CIOs, Asset Allocators, Portfolio Managers and Quant Researchers. The complete database of pensions & investment whitepapers is curated by Savvy Investor, the world’s leading reference hub for institutional investors.

In order to browse all global asset allocation research, you can either view all asset allocation articles and white papers, or visit Savvy Investor’s full search directory. Using the latter approach, you will be search by keyword and date published. To look for the best white papers covering a specific area of interest (e.g. LDI investing, Equity Valuation Models or Tactical Asset Allocation) simply enter the relevant keywords into the search menu above and click “search”.

For Asset Allocators who decide to passively follow the benchmark, Strategic Asset Allocation, it will still be necessary to conduct periodic portfolio rebalancing. Our list of the best papers on portfolio rebalancing shows the importance of doing this in a disciplined manner; not only to remain compliant with the investment guidelines, but also in recognition of the fact that portfolio rebalancing can often be a source of unintended alpha.

Whether an organisation is following an active or passive approach to asset allocation, it is a very useful exercise to seek to forecast Expected market returns. Given the uncertainty surrounding such estimates, these are best framed over a relatively long time period, such as 5 or 10 years. Also known as capital market assumptions, these estimates will normally be based around assumptions for inflation, earnings/dividend growth and some assumptions with regard to equity market valuations reverting towards long-term norms. For instance, some analysts will use a tool such as the Equity Risk Premium, as espoused, for instance, by Aswath Damodoran.

Once long-term return forecasts or capital market assumptions have been determined for each asset class, it is possible to construct what is known as a Capital Market Line. The Capital Asset Pricing Model (CAPM) posits that asset classes which exhibit higher risk should also generate higher return, to compensate for that risk. The Capital Market Line (CML) plots the relationship between expected returns and expected risk (with risk normally defined as the standard deviation of returns from that asset class). Savvy Investor has a great list of the best papers on the Capital Market Line.

For investors who are concerned about the risk of higher inflation, a key asset allocation question revolves around the proportion of the fund to be placed in so-called “Real Assets”. This is the term given to asset classes which will tend to hold their value, over the long-term, in an inflationary environment. This includes physical assets such as infrastructure investments, commercial real estate, farmland and timberland, but also inflation-protected government bonds, such as TIPS and index-linked. Here you will find some of the best research on investing in real assets.