papers conference may 25, 2011 jack white, cfa todd...
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PAPERS Conference
May 25, 2011
Jack White, CFA
Todd-Veredus Asset Management
1
Stocks versus bonds
Growth versus value
Large cap versus small cap
International versus domestic
Asset allocation is the way investors diversify their
portfolio among different investment options.
Asset Allocation is the Most Important Step in Determining Expected Volatility and Investment Results.
2
Real Estate
Commodities Int’l Equities
Domestic
Equities
Fixed Income
Investment
Options
All primary asset classes will fall into one of these
groupings, or be derived from them.
3
Assets have different return and risk characteristics
Correlation is a key concern
Goal: Minimizing Correlation while improving returns
Cycles do occur
Diversification theory shows a mix of assets can lower
volatility and improve returns for the risk taken.
Improved returns with less volatility are the goals of
most pension funds.
4
Results – Asset Allocation is Primary Ingredient
“93%-95% of difference in return is attributable to asset allocation.”
William F. Sharpe
Source: Financial Analysts Journal, July-August 1986
93%
2%
2%
3%
Asset Allocation Security Selection
Market Timing Undetermined
5
Asset Class Returns and Volatility 1991-2010
Source: Morningstar
Bar Cap US AGG Bond TR USD
DJ UBS Commodity TR USD
FTSE NAREIT All REITs TR
MSCI EAFE GR USD
Russell 1000 TR USD
Russell 2000 TR USD 14.0
13.8
13.6
13.4
13.2
13.0
12.8
12.6
12.4
12.2
12.0
11.8
11.6
11.4
11.2
11.0
10.8
10.6
10.4
10.2
10.0
9.8
9.6
9.4
9.2
9.0
8.8
8.6
8.4
8.2
8.0
7.8
7.6
7.4
7.2
7.0
6.8
6.6
6.4
6.2
6.0
5.8
5.6
5.4
5.2
5.0
Expected Return
0.0 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 13.0 14.0 15.0 16.0 17.0 18.0 19.0 20.0 21.0 22.0 23.0
Standard Deviation (Risk)
6
Correlation of Selected Asset Classes to Large Cap Stocks 1995-2010
Source: Morningstar
Interval: 60
Correlation Values
-0.40
1.00
-0.30
-0.20
-0.10
0.00
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.900.90.90.8
0.5
0.2
Dec1995
May2010
Jun1996
Dec1996
Jun1997
Dec1997
Jun1998
Dec1998
Jun1999
Dec1999
Jun2000
Dec2000
Jun2001
Dec2001
Jun2002
Dec2002
Jun2003
Dec2003
Jun2004
Dec2004
Jun2005
Dec2005
Jun2006
Dec2006
Jun2007
Dec2007
Jun2008
Dec2008
Jun2009
Dec2009
vs. FTSE NAREIT All REITs TR vs. BarCap US Agg Bond TR USD vs. Russell 2000 TR USD vs. MSCI EAFE GR USD vs. DJ UBS Commodity TR USD
Higher correlations between asset classes dilute diversification benefits.
Correlation Values
1.00
0.90
0.80
0.70
0.60
0.50
0.40
0.30
0.20
0.10
0.00
-0.1
-0.2
-0.3
-0.4
Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec Jun Dec May
1995 1996 1996 1997 1997 1998 1998 1999 1999 2000 2000 2001 2001 2002 2002 2003 2003 2004 2004 2005 2005 2006 2006 2007 2007 2008 2008 2009 2009 2010
Interval: 60
vs. FTSE NAREIT ALL REITs TR vs. BarCap US Agg Bond TR USD vs. Russell 2000 TR USD vs. MSCI EAFE GR USD vs. DJ USB Commodity TR USD
0.9 0.9
0.8
0.5
0.2
7
12 Month Returns - Rolling Monthly (12/89 - 03/11)
EAFE vs. SPX Russell 1000 vs. Russell 2000
12 Month Returns - Rolling Monthly (12/79 - 03/11)
Source: Todd-Veredus Asset Management, FactSet
8
• Strategic – (Static) takes a long-term view and does not change much from year to year. Evolutionary… not revolutionary.
• Tactical – (Active) structures portfolios to take advantage of shorter term market inefficiencies. Asset weights vary more from year to year.
– Tactical Asset Allocation
– Global Tactical Asset Allocation
– Dynamic Asset Allocation
– Market Timing
Two major camps - Strategic vs. Tactical
9
• What is Standard- 60/40? 70/30? Other?
• Benchmarked to an index
• Constrained versus unconstrained
• Class limitations
10
• Rebalancing Frequency
• Implementation- Active or Passive
• Liability Driven Investing
• Glide Path Investing
11
• Investors set goals and risk tolerances
• Improves probability of achieving goals
• It provides a benchmark to judge results from
PAPERS Conference
May 25, 2011
Jack White, CFA
Todd-Veredus Asset Management