Asset Allocation

Empirical academic research has consistently demonstrated that a portfolio's overall investment return is more dependent upon the underlying asset allocation than any other factor. Because of this, Wurts & Associates devotes considerable time and attention to our clients' asset allocation decision process.

There are two critical sets of inputs to the asset allocation process - capital market assumptions and the projection of future liabilities. With regards to the capital market assumptions, we utilize a rigorous evaluation process that combines external research and data with the efforts of our own internal research department. The result is a valid set of assumptions on the expected returns, risk and correlations for the underlying asset classes. This is combined with projected cash flows that are provided by fund professionals, such as the actuary, administrator, or Treasurer, depending upon the type of plan sponsor.

The inputs are then modeled into the asset allocation software, along with constraints and other factors that are unique to each client, such as the determination of which asset classes to include or exclude. During this phase, it is also important to reflect upon the strategic objectives and risk tolerance of the fund sponsor, based their prior experiences with the plan and knowledge of their expectations.

For defined benefit plans we analyze future liabilities by loading the fund's actuarial projections into a sophisticated asset/liability model. For endowment and foundations, we focus on the projected spending policy and special cash flow requirements over time.

The asset allocation model output provides us with probabilistic information on alternative allocations across various economic scenarios. Optimal portfolio allocation mixes that provide the highest expected return for various expected risk levels are then identified for review with the client. The model can be rerun numerous times to reflect various funding or spending scenarios so that the plan sponsor can become comfortable with the range of likely outcomes under the various allocations. Depending on the needs of the client, Wurts & Associates uses mean/variance optimization, surplus optimization, and/or downside risk analysis to help us arrive at an optimal asset allocation solution. Throughout the process, we focus on quantifying not just the expected case but also the downside risk in terms meaningful to the fund sponsor.

Proper asset allocation lets the fund sponsor:

• Maximize expected investment performance within specific risk constraints
• Evaluate projected funding requirements against various asset mixes
• Quantify risk and return potential of various asset classes
• Optimally diversify assets among different investment styles
• Plan future contribution requirements