DeMarche by liaoqinmei

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									Tactical Asset Allocation
  in Bull/Bear Markets


    Timothy J. Marchesi, CFA
     President, CEO & Co-CIO
    DeMarche Associates, Inc.


                                DeMarche
                                Associates, Inc.
                     Agenda
•   Importance of Asset Allocation
•   Tactical vs. Conventional Approach
•   Economic & Market Environment
•   Supercycles
•   Dynamic Investment Strategies




                                         DeMarche
                          2              Associates, Inc.
    Importance of Asset Allocation
•   Studies estimate that asset allocation decision
    accounts for 91.5% of the variation between
    returns of different funds 1

•   Asset mix optimization models mathematically
    seek maximum expected rate of return for a given
    level of risk (or minimization of risk for a given
    expected return) 2
     1   Financial Analysts Journal, May/June 1991 – Brinson, Singer & Beebower
     2Global Asset Allocation Techniques for Optimizing Portfolio Management, 1994 – Lummer &
     Riepe



                                                                                          DeMarche
                                                3                                          Associates, Inc.
     Review of Conventional Approach
•   Inputs based upon history
•   Typical models assume “average” future outcomes
•   Often ignore starting /ending market levels
                                           Large Capitalization Stocks
                                                     Distribution of Returns
                                                                                                               Quarterly One-Year Returns
                                                                                                                               1926-2009


                           40

                           35

                           30

                           25

           Number of
                           20
           Occurrences

                           15

                           10

                             5

                             0
                                 -50 -45 -40 -35 -30 -25 -20 -15 -10 -5       0   5   10   15    20   25    30    35    40    45   50
                                                                    Percent Return

         Source: S&P 500 Index                                                             Some returns are greater than 50% and less than -50%


                                                                                                                                                  DeMarche
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   Review of Conventional Approach
• Typical models assume “average” future outcomes
  (sample chart below)
       12%
                                            Emerging Equities
       10%
                                            Small Cap Equities
                                            Large Cap Equities
       8%
                                            Hedge Fds
       6%                                   Bonds

       4%

       2%


             Today   2015   2020   2025   2030
                                                            DeMarche
                              5                                 Associates, Inc.
One-Year Returns Are Volatile
 Models incorporate standard deviation to manage risk




                                                        DeMarche
                          6                             Associates, Inc.
Model Optimization:
The Efficient Frontier




                         DeMarche
          7              Associates, Inc.
                 What is Tactical?
Webster’s:
  •   “Small-scale action to serving a larger purpose”

In Investment Management:
  •   Method of modifying asset allocation based upon
      valuation estimates and judgments of the future
      return of markets or sectors




                                                     DeMarche
                            8                        Associates, Inc.
Time Horizon for Investment Objectives
   Asset Allocation Study has both a strategic perspective and
   a long-term secular perspective



                   Investment Horizon
    Short                                                            Long
    Term                                                             Term



  Market             Tactical            Strategic                 Secular
  Timing              Asset                Asset                    Asset
                    Allocation           Allocation               Allocation

  One Year        Current Market         Several Market          Multiple Market
   Or Less         Phase Cycle            Phase Cycles            Supercycles

                                                                            DeMarche
                                     9                                      Associates, Inc.
                DeMarche Market Phases
  A typical market cycle has four distinct phases:

                                           Stock              Corporate             Total
Tactical Market Phase                      Prices             Earnings             Return*
Phase I – Early Bull                                                             62.0%
Phase II – Bull Market                                                           20.8%
Phase III – Late Bull/Early Bear                                                  0.5%
Phase IV – Bear Market                                                           -27.0%
*Annualized cumulative returns of S&P 500 Index. Study based upon monthly data from 1/31/63-
9/30/11. The annualized cumulative return for the full study period was +9.5%.
Source: DeMarche Research




                                                                                      DeMarche
                                              10                                        Associates, Inc.
               Markets Change
Markets change over long periods of time
 •   As markets change, relative value between asset
     classes changes
 •   DeMarche research has acknowledged and
     identified these long wave markets as
     “Supercycles”
 •   Multiple bull and bear markets exist within each
     “Supercycle”



                                                  DeMarche
                          11                       Associates, Inc.
           DeMarche Supercycle Study
                                         Bank Panics/     Market Cycles
      Supercycle         Years            Recessions    (Bull/Bear Cycles)
A. High Growth        1900 – 1929             8                 8

B. Moderate Growth    1929 – 1942             3                 5

C. High Growth        1942 – 1966             5                 8

D. Moderate Growth    1966 – 1980             3                 6

E. High Growth        1980 – 2000             2                 5

F. Moderate Growth   2000 - Present           2                 3



                                                                    DeMarche
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              DeMarche Supercycle Study

   Supercycle               Beginning                     End             DJIA Price Return*

         A                     1900                      1929                     +882%

         B                     1929                      1942                      -75

         C                     1942                      1966                     +701

         D                     1966                      1980                      +2

         E                     1980                      2000                     +1,444

         F                     2000                   Present*                      -5

*As of 3/31/2011. Cumulative returns are shown for each cycle (non-annualized).

                                                                                         DeMarche
                                               13                                        Associates, Inc.
     The Consumer in Supercycles
    Supercycles     Environment
A     1900 – 1929   High population growth
B     1929 – 1942   High unemployment
C     1942 – 1966   Baby boom / income growth
D     1966 – 1980   Inflation
E     1980 – 2000   Expansion of consumer credit
F       2000 – ?    Demographics & debt



                                                   DeMarche
                         14                        Associates, Inc.
                New Normal
         Macroeconomic Environment
•   Demographics
        “Boomers” retire or shift emphasis from consumption
         to saving
•   Consumers gradually improve their finances
        Paying down debt / increase savings




                                                         DeMarche
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 New Normal Macroeconomic
    Environment (cont’d)

• Unemployment
• Wage growth remains slow
• Less help from asset gains (wealth effect)
• Higher taxes




                                               DeMarche
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          Strategic Implications of
            Current Supercycles

•   Stock returns likely to underperform mean
•   Bond returns likely to underperform mean
•   Policies need other strategies to improve expected
    risk/return outcomes




                                                  DeMarche
                          17                       Associates, Inc.
Asset Allocation – Expected Returns
Next 5 Year “Strategic” Period versus Long-Term “Secular” Time Horizon




Source: DeMarche Associates. See notes on next slide.
                                                                   DeMarche
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Asset Allocation – Expected Returns (cont.)
•   Notes for chart on prior page:
•   Represents geometric return estimates for the 5 years
    beginning January 2012, compared to long-term average
    geometric returns over multiple Supercycles (no specific
    beginning point). 5-year horizon utilizes an assumption of a
    moderate economic growth environment within the current
    Supercycle, as defined by DeMarche.
•   U.S. Fixed Income has poor E.R. over the strategic period.
    Such assets presently have very low current income yield
    and are at risk of principal value losses as interest rates rise.
•   Other asset classes are shown for comparison.



                                                               DeMarche
                                 19                             Associates, Inc.
    Dynamic Investment Strategies
•   Hedge Funds
•   Global Tactical Asset Allocation (GTAA) Funds
•   Lifecycle or Target Date Fund (TDFs)
•   Intro to some assets used by dynamic strategies
        Commodities
        High Yield Bonds
        Emerging Market Bonds




                                                 DeMarche
                           20                     Associates, Inc.
          Brief Intro to Hedge Funds
             and GTAA Strategies
•   Different HF Fund of Funds approaches for clients
         Conservative – emphasis on diversification, lower
          volatility
         Strategic – more use of directional market bets,
          leverage
•   GTAA is long-only, relative valuation-based
•   Fees higher with HF
•   Limited transparency with HF
•   GTAA correlation is high (vs. stocks/bonds)
•   Wide variance across manager/strategies
                                                              DeMarche
                               21                             Associates, Inc.
Sample Range of GTAA Fund Approaches
                                   Classic        More Complex   Comprehensive


     Asset Classes Used
                           Cash      X                 X              X
               Domestic Equity       X                 X              X
            International Equity                       X              X
      Emerging Markets Equity                          X              X
               Domestic Bonds        X                 X              X
            International Bonds                        X              X
      Emerging Markets Bonds                           X              X
              High Yield Bonds                                        X
      Inflation Protected (TIPS)                       X              X
                   Convertibles                                       X
                  Commodities                          X              X
           Real Estate (REITs)                                        X
           Listed Private Equity                                      X
                      Currency                         X              X



     Typical Investments
                 Mutual Funds        X                 X              X
            Closed-End Funds                           X              X
      Exchange-Traded (ETFs)         X                 X              X
           Individual Securities     X                 X              X
                    Derivatives                        X              X

                                                                                 DeMarche
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          What is a Target-Date Fund?

• Description of TDF (or Lifecycle Fund):
       Diversified investment option
       Target a specific retirement year (2020, 2030, etc.)
       Professionally managed
           –   Stock allocation reduced as retirement year nears
           –   Disciplined rebalancing of underlying funds
       May use less-traditional investments




                                                                   DeMarche
                                    23                             Associates, Inc.
     Example of TDF Asset Allocation
     Fewer equities as participant retire date nears




Source: PIMCO, compiled by MarketGlide.




                                                       DeMarche
                                     24                Associates, Inc.
                                                                TDF Glidepaths
Programs reduce equities over time; some have tactical range
                                                                                     Glidepath
                                                                         Active Average vs Passive Average
                                     100




                                     80
      Percentage Equity Allocation




                                                                                                                                      Passive
                                     60                                                                                               Manager
                                                                                                                                      Average

                                                                                                                                      Active
                                                                                                                                      Manager
                                                                                                                                      Average
                                     40
                                                                                                                                      Industry
                                                                                                                                      Max


                                                                                                                                      Industry
                                                                                                                                      Min
                                     20




                                      0
                                           2055   2050   2045   2040   2035   2030   2025   2020   2015   2010   2005   2000   1995




                                                                                                                                           DeMarche
                                                                                      25                                                     Associates, Inc.
                        Brief Intro: Commodities
•      Energy, Metals, Agriculture, Livestock
•      Weights differ among several indexes
                 S&P has 65-75% Energy: others cap at 33%
•      Portfolio diversifier
                 Hedge against unexpected inflation
                 Slight negative correlation to stocks & bonds in past
•      Liquidity varies; fund choices very distinct
•      Key concerns: China, oil, gold
Total return from commodities comes from combination of: rolling futures contracts (roll yield), yield from the cash collateral, and the spot price gain or
loss. Derivatives use is widespread (active or passive).




                                                                                                                                                   DeMarche
                                                                              26                                                                     Associates, Inc.
Brief Intro: High Yield & Emerging Market Bonds
•   Both have low correlations to U.S. Bonds
•   U.S. High Yield Bonds
       Quality ratings of “BB” or lower (below investment grade)
       Average maturities 3-10 years
       High level of current income payments
       Default risk rises in recessionary periods
       Higher volatility and potential losses than other fixed income
•   Emerging Market Bonds are investment grade
       Obligations of foreign government or corporation
       Average maturities 3-10 years
       Higher fees (management, transaction, custodial)
       Political, liquidity, and other risks differ from U.S. bonds
       Currency risk (some issued in U.S. dollars)

                                                                         DeMarche
                                         27                              Associates, Inc.
          Recommendations

•   Adjust asset allocation more frequently
•   Incorporate Supercycles
•   Emphasize liquidity
•   Diversify
•   Increase allocation to dynamic strategies




                                                DeMarche
                       28                       Associates, Inc.
Questions?

Thank you!


             DeMarche
    29       Associates, Inc.

								
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