Developing Asset Allocation and Investment Strategies
Segal Advisors can help clients review the asset allocation structure of their fund 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 encourage client involvement throughout the process. First, we discuss with the client which asset classes should be further explored in the upcoming investment strategy study. Secondly, if necessary, we provide educational communications on any asset classes the client may not be totally familiar with. Thirdly, we review with the client possible asset class combinations and come to a consensus on the most appropriate target allocation going forward.
Through the designation of a target asset mix and a target benchmark, we define the plan's proper asset allocation within an acceptable range of expected risk and return parameters, permissible investment vehicles and management style.
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 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 will make recommendations regarding the existing investment structure and viable investment manager structure alternatives, if necessary, 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.
