Tuesday, November 2, 2010

Dynamic Asset Allocation Strategies

Dynamic Asset Allocation strategies are very useful policies for defined benefit plans. What does this type of policy entail? Well, it means that the investment manager is actively looking at a defined benefit plan’s actuarial valuation and using that information to then develop an independent measure of funding status in the interim, on a quarterly basis – an analysis uncommon in an industry focused on capturing alpha or liability driven investing alone.

Funded status is the primary driver of the plan’s allocation within the plan’s Risk Category (or fixed range of allowed equity exposure). This process allows the investment manager to swiftly take action whenever market conditions change through tactical adjustments to the plan’s allocation. This should be fully defined in the IPS and reported in the Fiduciary Monitoring Report; as such, it eliminates the need to obtain approval at the committee level for a change in the plan’s investment strategy every time market conditions drastically change versus the parameters prescribed in the plan’s IPS. The process is documented and anticipates a prudent course of action ahead of these changing market conditions. The focus stays on the funded status of the plan and not simply capturing investment performance.

This is an important approach when investing in a liability driven environment such as the retirement market. Our clients are widely diversified demographically speaking, and present us with a variety of goals that they hope to accomplish within a very real and finite period of time. It's usually less time than is necessary. By focusing on the anticipated liability of a pool of assets (such as defined benefit assets) or individual participant accounts, it is much easier to implement a strategy that either helps the client achieve their goals, or at least, helps them narrow the gap between where they currently are and where they wish to be in the future. Dynamic asset allocation strategies and managed participant accounts not only assist the client with determining where they currently are with regard to meeting their goals, but they vastly improves the probability of reaching their goals, as well. It's compelling evidence for a client, and a service provider, to know that an actual solution is being provided.

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