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Challenging Asset Allocation Promises

Challenging Asset Allocation Promises. W. A. Ruch, III, CIMA Chief Executive Officer Sterne Agee Asset Management, Inc. Sterne Agee Investment Advisors, Inc. Trust Company of Sterne Agee FIRMA-Orlando, FL April 9, 2008. Universal Investment Quest. Managing Risk for Client.

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Challenging Asset Allocation Promises

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  1. Challenging Asset Allocation Promises W. A. Ruch, III, CIMA Chief Executive Officer Sterne Agee Asset Management, Inc. Sterne Agee Investment Advisors, Inc. Trust Company of Sterne Agee FIRMA-Orlando, FL April 9, 2008

  2. Universal Investment Quest Managing Risk for Client

  3. Risk Management = Asset Allocation Modeling • Strategic Asset Allocation An investment strategy that aims to balance risk and reward by apportioning a portfolio's assets according to an individual's goals, risk tolerance and investment horizon. At the inception of the portfolio, a "base policy mix" is determined based upon expectedreturns. Because the value of assets can change given market conditions, the portfolio constantly needs to be rebalanced to meet the policy.

  4. Diversification Ingredients • Major Classes- stocks, bonds, cash • Style Categories- LCG, MCV, GL, INT, MCG, MCV, SCG, SCV,ITM, LTM, TB, ITF-T, LTF-T, MMF, etc… • Alternative Investments- real estate, energy, basic commodities, currency • Alternative Strategies- equity hedge, event driven, macro, relative value

  5. Investment Program Packaging • SMA – Separately Managed Accounts • UMA – Unified Managed Accounts • MSA – Multi-style Accounts • MSP – Multiple-style Portfolios (Models) • OMS-Overlay Management Strategies

  6. Steps in Asset Allocation Process Risk Profiling Model Selection Selection Funds & Managers Rebalancing

  7. Investment Proposal Path Risk Tolerance Questionnaire

  8. Investment Proposal Path Alternative to the Questionnaire

  9. Steps in Asset Allocation Process Risk Profiling Model Selection Selection Funds & Managers Rebalancing

  10. Asset Allocation – Mean Variance Optimizer

  11. Asset Allocation – Model Portfolios (Expected Returns)

  12. Active Manager/Fund Recommendations Proposed Product Allocation

  13. Active Management vs. Indexed Returns (Back-testing)

  14. Steps in Asset Allocation Process Risk Profiling Model Selection Selection Funds & Managers Rebalancing

  15. Approved Funds & Managers (Historical Data Judgements)

  16. Due Diligence Process - Schematic Premier Managers • Quantitative • Performance • Portfolio Stats • Risk Statistics • Peer Groups • Qualitative • People • Process • Firm • Operations Advanced Analytics Skill Persistency Traditional Due Diligence Screening Universe Monitoring Comprehensive Analysis Committee

  17. Due Diligence Committee • Usually comprised of all senior staff and analysts • Consider inter-disciplinary group of professionals (sales, admin, & investments?) • Reviews all new and updated due diligence information including any findings and research updates • Approves all additions and deletions to the Approved List • Monitors the “watch lists” • New & problem managers

  18. Base Criteria

  19. Comprehensive Analysis on Funds & Managers • Traditional analysis addresses • Performance relative to the benchmark • Performance through market cycles • Risk-adjusted performance • Performance relative to peers • Style consistency • Additional analysis to address • Manager skill assessment • Propensity to continue to add value • Analysis on new managers results in: • Approved • Conditionally approved • Non-approval

  20. Performance Opportunity Distributions – An Example Source: PPCA-Inc.

  21. MSCI Barra Performance Analyst – An Example Acme Management Large Cap Core Strategy – January 2001 to December 2006 Source: MSCI Barra

  22. DD Committee Manages Information Flow to Financial Institution and Advisors • Firm Level Notification • Formal announcement through the Research Update is made available • Depending on the circumstances, the financial institution can determine the course of action for their particular platform • Issues List • Managers reviewed during the quarter • Summary of discussions from Due Diligence committee meetings • Actions taken by by the committee during the quarter • Advisor and Firm Level Notification • The Research Update is posted online as a bulletin informing all advisors of the issue and recommended course of action • The bulletin information is also included in future editions of the Manager Profile • Web conferences ?

  23. Findings End Up in Marketing Material • Displayed due diligence information collected by research team • Updated quarterly and posted to the web • Last page is for the advisor • Fee schedule, minimums, sales and service policies • Important Notes section for relevant information • i.e., Why a manager is on alert or why a manager holds ADRs

  24. Steps in Asset Allocation Process Risk Profiling Model Selection Selection Funds & Managers Rebalancing

  25. Rebalancing Standards • Manual or systematic process ? • Mandates and constraints ? • Cusips, separate accounts, overlay ? • Frequency ( % or moment in time) ? • Cost ?

  26. Considerations in Setting Up a Cusip Driven Model

  27. The Model or “Rebalancing Target”

  28. From A to B….Transitional Sensitivity

  29. Setting Model Tolerances (% of Holding-Range)

  30. Taxes Matter !!!

  31. Buy/Sell Recommendations Driven by Logical Approach

  32. In Closing… Questions ?

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