Asset Allocation and TAA

Asset Allocation and TAA - Articles & White Papers

Academic research and white papers on the asset allocation process (covering the process for both strategic asset allocation and tactical asset allocation). The strategic asset allocation process determines the long-term investment framework, taking into account a fund's over-arching objectives and/or the nature of the liabilities. The tactical asset allocation process (TAA or GTAA) represents the decision to deviate from the long-term benchmark... in order to gain excess return (alpha) by identifying which asset classes are likely to outperform or underperform in the short-term. Asset management firms are increasingly turning to more disciplined approaches to tactical asset allocation, and this is reflected in the papers receiving the most downloads. Many of the most popular articles are quantitative in nature, for instance examining a quantitative tactical asset allocation process, or examining risk parity, momentum and trend following in global asset allocation. Factor-based investing processes, which identify the risk factors likely to provide excess returns, are themselves gaining momentum, both for stock selection (smart beta) and within the asset allocation process itself. Papers which examine frameworks for assessing risk factors and implementing factor-based strategies are proving popular.

For those with a longer-term time horizon, the forecasting of long term equity returns takes on more importance. Hence papers which set out long-term capital market return assumptions have been extremely popular. Key factors taken into account by asset allocators include equity market valuation (is the market cheap or dear?), the earnings outlook, the business cycle and the supply and demand for the asset class. Many quant approaches to tactical asset allocation focus particularly on "value and momentum." The value in equity markets may be measured by a standard valuation measure, such as the Shiller P/E measure of 10 year CAPE (which tries to strip out the vagaries of a profits bubble or profits drought) or by a proprietary measure, often determined by regression analysis and quantitative backtesting. Papers on "value and momentum" have been very popular, as have papers which ask whether these models can be extended into emerging markets.

Often, the asset allocation process is driven by factors other than the market outlook. For instance, in liability-driven investment (LDI) the main driver is the nature and term of pension liabilities, whereas with a dynamic asset allocation process, the fund seeks dynamic downside protection, reducing the allocation to risky assets as the market declines. Papers on dynamic asset allocation and reports on liability-driven investing (LDI) have both proved popular, as has a paper on a new concept termed volatility-driven investing (VDI). Other popular white papers in this section consider alternative beta strategies, the impact of demography (and baby boomer retirements) upon asset prices, long-term investing frameworks and portfolio diversification.

Within the Strategic Asset Allocation process, investors may wish to consider an allocation to "real assets". These are assets such as commercial property, infrastructure and commodities, which tend to be physical in nature, and which provide long-term protection against unexpected inflation. However some financial assets, such as inflation-linked bonds, would technically also be considered "real assets". Visit our latest Savvy Blog post on real assets.
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