Asset Allocation and TAA

Asset Allocation and TAA - Articles & White Papers

Academic research and professional white papers on asset allocation (both strategic asset allocation and tactical asset allocation). Strategic asset allocation is the long-term investment framework, taking into account a fund's over-arching objectives and/or the nature of the liabilities. Global tactical asset allocation (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 approach to TAA, or examining risk parity, momentum and trend following in global asset allocation. Factor-based investing strategies, which identify the risk factors likely to provide excess returns, are themselves gaining momentum, both for stock selection (smart beta) and for asset allocation. 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 TAA 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 asset allocation policy 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 dynamic asset allocation, 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.
  • CFA Institute Research Foundation

    Financial Market History: Reflections on the Past for Investors Today (CFA Institute Research Foundation)

    This 279-page compendium of papers, published by CFA Institute Research Foundation, provides a detailed and fascinating look at the history of financial markets. Each section, which has been authored by prominent industry professionals, discusses a different facet of financial markets including risk and return over the long run, bubbles and crises, financial innovation, and more. A ...

    • Professional
    • Views: 2474
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  • Robeco

    Expected Returns 2017-2021: It’s Always Darkest Just Before Dawn (Robeco, Oct 2016)

    Sentiment among professional investors seems to have reached new lows, and truly, there are enough reasons investors can think of to justify a bearish view on financial markets. We can see the disintegration of the European economy (Brexit, the rise of populist parties, Italian banks), a Chinese hard landing (unsuccessful rebalancing of the Chinese economy, high debt), a rise in ...

    • Professional
    • Views: 5694
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  • BlackRock

    Equity/Bond Correlation: Historical Reflections and Future Prospects (BlackRock, July 2016)

    The correlation between equity and bond markets is of vital importance to asset allocators; for risk control and portfolio construction, for assessing the market outlook, and for building models of how markets work (equity market valuation models, for example). In this 6-page paper, Nuno Luis and David Caplan of BlackRock examine the history of the equity/bond ...

    • Professional
    • Views: 2026
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  • Focusing Capital on the Long Term

    Long-Term Investing - Portfolio Guide (2015)

    This 60-page report investigates a variety of approaches that may be taken by institutional investors in order to find new long-term investment strategies. Examining the five key action areas (risk appetite statements, investment mandates, benchmarking processes, evaluations and incentives, and investment benefits), this paper's authors develop a framework for the improvement ...

    • Professional
    • Views: 2910
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  • QMA (Quantitative Management Associates)

    Investing in Liquid Alts: An Outcomes-Based Approach (QMA, Apr 2017)

    As more investors seek new sources of returns less correlated with the downward swings of the equity and bond markets, liquid alternative strategies have emerged as one of the more viable, and popular, investment options. Investors and their financial advisors are conditioned to select managers based on the asset class they invest in, frequently a less important consideration when ...

  • BlackRock

    Capital Market Assumptions: BlackRock's methodology for long-term returns (2017)

    What investment returns can we expect in the long term across asset classes? Such assumptions are a key input of asset allocation decisions for institutions, financial advisors and individual retirees. This document presents the methodology used to calculate the BlackRock Investment Institute’s long-term equilibrium capital market assumptions (CMAs), the long-term complement ...

    • Professional
    • Views: 1525
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  • AQR Capital Management

    Fact, Fiction and Momentum Investing (AQR Capital, 2014)

    Authored by Cliff Asness and others from AQR Capital, this paper examines the "myths" surrounding momentum investing, using results from a variety of academic studies. The paper aims to clarify the facts with regard to the efficacy of trend-following strategies and to document the practical value of momentum within the investment process.

  • Equity Risk Premiums: Determinants, Estimation and Implications (Damodaran, 2016)

    In this paper, Professor Aswath Damodaran examines ways of estimating equity risk premiums (ERP). He begins by considering the economic determinants of ERP, including information uncertainty, perceptions of macroeconomic risk and risk aversion by investors. This is the 9th edition of this paper. It has been produced annually since the global financial crisis of 2008.

  • Vanguard

    A framework for institutional portfolio construction (Vanguard, 2016)

    Typically, institutional investors around the world pursue one of four investment goals: absolute return, liability-driven investment, total return or principal protection. Generally, they choose from four different investment approaches: static tilts, traditional active management, market-capitalization exposures and alternative investments. Given the aforementioned potential ...

    • Professional
    • Views: 2166
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  • A Quantitative Approach to TAA (Mebane Faber)

    This influential paper is Mebane Faber's update to his 2006 version. It incorporates new data from the period 2008-2012. The paper 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. He also examines the ...

    • Quantitative
    • Views: 1002
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  • MSCI

    Bridging the Gap: Adding Factors to Passive and Active Allocations (MSCI)

    • 04 May 2017
    • Company: MSCI

    Asset owners face a challenge in determining how the factor allocation fits into the overall equity program: How does the factor allocation relate to the existing roster of active managers? This paper uses a risk budgeting framework to investigate how active mandates and factor allocations can be combined. Risk budgeting connects the manager selection process with the factor ...

  • JP Morgan - Asset Management

    2017 Long-Term Capital Market Assumptions (JP Morgan)

    This edition of JP Morgan's Long-Term Capital Market Assumptions is written against a backdrop of low investment return expectations, slow global growth and unprecedented monetary policy decisions. The paper considers the long-term impact of the structural factors affecting economies today on a 10 - 15 year investment horizon. 

    The detailed 90 page document ...

    • Professional
    • Views: 1152
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  • Research Affiliates

    A Framework for Assessing Factors and Implementing Smart Beta Strategies (2015)

    Published in the Journal of Index Investing, this article argues that the academic literature is littered with a "zoo" of apparently smart risk factors, which in practice will go unrewarded, being the result of spurious and unwarranted data-mining, The authors suggest a methodology whereby robust, investable, risk factors can be identified, which make intuitive sense and ...

    • Professional
    • Views: 1386
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  • The Divergence of High- and Low-Frequency estimation

    This paper is a collaborative effort between State Street Global Exchange and Windham Capital Management. It provides findings that are important to asset allocators looking at long-term asset allocation goals. High-frequency estimation, according to the paper, does not predict behavior reliably in the long-term, even if no sampling error is present. Investors should, when ...

  • The Trend is Our Friend: Risk Parity, Momentum and Trend Following in Global Asset Allocation (2014)

    The authors of this paper examine the effects of trend application methodologies when applied to global asset allocations amongst commodities, bonds and real estate. Trend following application offers a significant improvement, in comparison to traditional buy-and-hold portfolios, to risk-adjusted performance. It is also a method of asset allocation superior to risk parity. A ...

    • Quantitative
    • Views: 1076
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  • Royal London Asset Management

    Securitised Bonds: Finding Security in Bond Markets (RLAM, 2017)

    Secured (or securitised) bonds still carry the stigma of the 2008 financial crisis. But stigma often spells opportunity, and the fixed income specialists at RLAM argue that this asset class offers great value for managers who are prepared to get to grips with the documentation underlying individual securities. Not everyone is prepared to do this research, and as a result secured ...

  • Schroders

    Long-run asset class performance: 30yr return forecasts (2017-46) Schroders

    Schroders Economics Group produces 30-year return forecasts, on an annual basis, for a range of asset classes. Here they outline the methodology used, which is based on a series of building blocks and estimates of risk premia, and surmise the key conclusions from our analysis. For the first time, this year they are also publishing a wider range of country-specific returns for ...

    • Professional
    • Views: 1604
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