Asset Allocation and TAA

Asset Allocation and Portfolio Construction: the best recent papers

The Best New Research on Portfolio Construction

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Here are some of the best recent papers on the subjects of portfolio construction and asset allocation:


A framework for institutional portfolio construction (Vanguard)
Institutional investors typically pursue one of four investment goals: liability-driven investment, total return, absolute return, or principal protection. Generally, they choose from four different investment approaches: traditional active management, market-capitalization exposures, static tilts, and alternative investments. Given these potential goals and approaches, this document considers which are the best for investors building their portfolio.

How the Science of 'Rewarded Risk' is Redefining Diversification (BlackRock)
The authors of this 12-page paper suggest that asset classes are an amalgamation of six different common risk factors: credit, emerging markets (political), economic, liquidity, inflation and real rates. They propose that these important risk factors offer more clarity regarding the drivers of asset class returns and their co-movements.

Introducing a Comprehensive Investment Framework for Goals-Based Wealth Management (EDHEC)
This paper develops a framework that seeks to help individual investors in the allocation of their assets to various categories in an efficient and optimal manner. The framework takes into consideration risks these investors will face across all wealth segments and life stages so as to achieve meaningful financial goals.

Alternative Beta (bfinance)
In this 12-page paper, the authors examine ‘alternative beta’, a concept which extends beta investing into the alternative investment space. There is no widely-accepted definition of "alternative beta", but the authors explain it as a systematic and passive capture of risk premia beyond traditional equity, bond and credit market exposures, using alternative investment techniques.

The Divergence of High- and Low-Frequency estimation (SSGA)
A useful paper for asset allocation decision-makers. The authors suggest that high-frequency estimation does not reliably predict long-term behaviour. When constructing long horizon portfolios, investors must include both high- and low-frequency returns methodologies in their risk estimates.

Risk Factors as Building Blocks for Portfolio Diversification (Callan)
In this 2012 paper, portfolio construction is explored with risk premia (risk factors) being the basic element. Such an approach may, in theory, produce lower correlations between portfolio components, which would lead to increasing efficiency and diversification of allocations, compared to traditional methods. Risk factor portfolios can help diversify portfolio risk, although few investors embrace full-scale implementation.

Using alternative betas to improve portfolio diversification (Columbia Threadneedle)
Alternative beta strategies are designed to capture risk premium in an arbitrage or long/short fashion; to provide authentic uncorrelated diversification in traditional or alternative portfolios.

Asset Allocation Research Papers

Expected Future Asset Class Returns for 2016-2020 (Robeco)
This is an excellent 120-page paper from Robeco. In it, the authors give their 2016-2020 expected return forecasts for major asset classes. They also set out in detail the building blocks underlying these forecasts.

Portfolio rebalancing: The Hidden Factor Exposure (Frontier Advisors)
Daniel Selioutine observes that regular, passive rebalancing of a portfolio (following a static benchmark allocation) generates an unintended negative exposure to the momentum factor. This 8-page report examines the implications.

Dynamic Asset Allocation through the Business Cycle (Oppenheimer)
The authors present an approach which allocates assets according to the macro regime. The report begins by defining macro regimes and assessing how the risk premia of different asset classes varies within each regime. Leading indicators are developed, which anticipate changes to a regime.

Investing in illiquid assets: A review (Robeco)
In this paper, the authors discuss the evidence, both theoretical and empirical, on illiquid asset investments, commenting on potential diversification benefits of illiquid investments, and drawing attention to associated problems and risks.

A Quantitative Approach to TAA (Mebane Faber, 2013)
This seminal paper is an update to Meb Faber's 2006 version. It incorporates new data from 2008-2012 and investigates how well the original work has held up since publication. Faber finds that overall, the models achieve equity-like returns with bond-like volatility and drawdowns, which was his original thesis in the 2006 paper.

The Trend is Our Friend: Momentum, Trend Following and Risk Parity in Global Asset Allocation
In this paper, the authors examine the effects of using trend-following strategies for global asset allocation amongst commodities, bonds and real estate. This trend-following approach is shown to offer a significant improvement in risk-adjusted performance, when compared to either a buy and hold strategy, or a risk parity approach.

A Practical Look at Enterprise Risk Analysis and Alternative Investments (BNY Mellon)
Enterprise risk analysis (scenario analysis and stress testing, for example) are becoming increasingly popular with institutional investors. Hedge funds, real estate, private equity and other alternative investments present challenges to enterprise risk analysis. This paper by BNY Mellon seeks to answer some pertinent questions that arise as a result.

Asset Class Risk - Methodology Overview (Research Affiliates)
This Research Affiliates paper sets forth the company's "building block approach" to developing long-term capital market expectations by asset class. In developing, as well as making their risk and return forecasts public, they seek to keep three key things in mind: robustness, transparency, and timeliness.

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