Strategic / Tactical Allocation.

J

JustPass

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
Client:
Tax exempt
Infinite time horizon
Low ongoing liquidity needs
No major spending events planned
Somewhat conservative in assuming investment risk
Decision makers not very savvy in investments
Assets $3 million USD
I’d like to know what you guys would do here in terms of strategic / tactical allocations among various assets classes given your long-term expectations and current state of the market. What vehicles (ETFs, MFs, Separate Accounts, etc.) would you utilize? Passive or active managers?
As you can tell there are very few pure investment constraints to worry about here… I’m interested to know what you/your firm would propose in this scenario. Thanks.
 
To be quite honest, $3M in assets will probably NOT qualify you for any separate account vehicles (unless you expect to have about 50% of your total assets in one fund). You might be able to get into some commingled funds, but most have some initial investment amount of, say, $1M.
I would stick with ETFs and MFs. Normally for clients with only $3M in assets, I would only allocation a small amount to alternatives (since the client is not too “savvy” and are somewhat risk adverse).
Stick with the typical 60/40 equity/debt. Consider maybe up to 10% of your 60% in opportunistic (if you can clearly articulate the reason for investing in alternatives to begin with).
Within equity, you should stay 100% passive in large cap, but 100% active in small cap. Split assets within small between growth and value. Be simple here; especially within large cap, managers probably won’t be able to generate any alpha going forward.
Within debt, you may want to consider half in long-duration fixed and the other half in market-duration fixed. Active preferred, but passive is fine as well. You’ll find some nice MFs out there in this space still.
Now here’s the fun:
For the speculative/opportunistic/alternative bets you may want to consider (if the client is willing to accept these “untraditional risks”)
1) convertibles (although mostly only allow SA or CTF vehicles)
2) AAA-rated ABS securities (through the TALF program, you can get up to 10:1 leverage) on highly rated ABS securities. Given the rating standards and oversights these days, you have to assume that AAA truly means the highest quality. This opportunistic allocation can be done by any fixed income manager – you can even have a carve out of your assets with existing fixed income managers and ask them to do this.
3) TIPS – still a good play
4) hold off on any REITs & Private Equity until you see signs of housing prices stabilizing and fundraising levels to pickup.
5) Hedge funds – stay away from equity or leveraged/arbitrage plays. Macro/GTAA and CTA/managed futures (given the consistent marking trending) are still two great strategies to be in.
 
Most major broker dealers have SMA platforms with $100k minimums. Why won’t large cap managers be able to add alpha going forward?
 
Cool, thanks for the comments.
I have access to some low minimum SA managers but will likely go the Fund/ETF route for these guys. I agree with passive in Large Cap mainly because I want to keep all-in costs low (not sure I agree that actives won’t add value however). Agree with active in Small Cap. Good ideas on tactical bets too.
I did a traditional mean variance analysis with my forward expectations built in and the results were different than a prospect like this may expect. I know that it is GIGO but thought I would take a gander at it. Here is the portfolio I think looks good from the MV analysis:
Cash 3%
TIPS 5%
HY 0%
INT AGG 10%
BANK LOAN 10%
US LC 15%
US MC 11%
US SC 20%
INTL DEV 5%
EM 20%
RE 0%
COMMODITIES 2%
I guess this boils down to a 70/30 mix.
Expected Return 1-YR Return= 9.0%
Expected Standard 1-YR Standard Devistion = 12.0%
Too ballsy to recommend 20% EM/SC? Please feel free to rip this apart. I’m intrigued by the relatively low volatility of the portfolio and decent return.
I want to differentiate myself from the pack… any suggestions?
 
large cap managers have never been able to consistently add alpha to begin with. especially for larger companies, the markets are efficient enough such that you can never choose (ex ante) the managers with the best skill level (however you measure skill, either qualitatively or quantitatively through information ratio or beta2 from the 2nd-power term regression models).
I’m not say that NO large cap managers can generate alpha for some certain time frame, but the issue is that you can’t select one with great certainty of their outperformance (net of fees).
Just take a look at all the “top” large cap managers recently. I have yet seen one that consistently place in the top quartile against some universe of large cap managers. Dodge & Cox, Hotchkis & Wiley, AJO, INTECH, are just some in mind that were GREATs at one point, but failed more recently. It’s just a philosophical position/belief that I have, and I rather take my active bets and allocate most of my risk budgeting outside of the large cap space.
 
just note that you’re setting up this allocation for a risk-adverse client. in such case, definitely 20% EM is too risky. I mean, in my personal portfolio, I wouldn’t mind (since I’m more risky by nature), but you really have to tailor this to your type of client.
remember that your MVO (mean variance optimization) is only as accurate as your inputs/assumptions. take it with a grain of salt. I normally only use it to confirm an idea (sorta cheating it a little if you ask me – very “data mining”-like, which i dread, but it’s part of the process nonetheless).
we recently funded an account (one of our institutional clients) with about 5% allocation to EM. This is for a $1 billion account and the committee is fairly sophisticated. Even then, they only recently added couple of allocations to more risky-bets. 20% is a bit stretching it. you might want to run a shortfall risk analysis (or VaR will work as well), or run some semi-deviation stats on your portfolio. Ask yourself if you’re willing to lose another 50% of your portfolio. Can you withstand/tolerate that kind of volatility? Those kind of losses (again)?
 
wow. if i tried to explain those strategies to my clients they would space out and lose interest within the first three sentences.
first of all, when you say “Somewhat conservative in assuming investment risk” I dont think of a 60/40 split like adalfu would. A 60/40 split recommendation one year ago would have lost approx (.6 x -43% + .4 x -14%) 31%. (SP 500 losing 43 Bond NAV losing 14)
Any client who is somewhat conservative and has 3M to invest is going to dismiss you when you take his 3M and leave him with 2,070,000.
Somewhat conservative to me means a portion in some brokered CDs or short term fixed annuities (which can yield 3-5% with some AAA rated companies). and a smaller portion, like 20% in equities. This is where the active management comes into play.
 
Great points. You are right all this stuff will go over their heads.
This is the type of client that expects you to never lose money and fully participate in market rallies which we know is all but impossible.
I think a 60/40 is pretty conservative given their ability to take risk.
 
adalfu Wrote:
——————————————————-
> large cap managers have never been able to
> consistently add alpha to begin with. e
I agree with you philosophically, I felt your post implied that something new had occurred that made it less likely that LC managers would outperform in the future.
 
“remember that your MVO (mean variance optimization) is only as accurate as your inputs/assumptions. take it with a grain of salt.”
+1
 
Good thread. Why no HY? Given the current yields it’s certainly an asset class that could generate future alpha for the portfolio barring defaults rates don’t climb north of 12-13%. I would tone down the EM allocation. 20% is far too high for what would be considered a 60/40 “conservative growth” portfolio. You could reduce the EM and potentially boost the commodities, hy, and lc holdings. There are some great managers in the less efficient asset classes who would be worth looking into. I’ll post a conservative growth MF lineup w/ allocations tomorrow that I use.
 
I like Bank Loan better… selling with similar yields and higher in the capital structure, otherwise it would probably be in there.
I know EM is way too high but over the long-term is probably the right thing to do.
 
I can definitely see why value managers have outperformed the market in the long-term…
 
Intermediate Term Bonds 18.00% Principal Inv Income A CMPIX
Large Cap Value 15.00% Eaton Vance Large Cap Value A EHSTX
Short Term Bonds 10.00% Vanguard Short Term Investment Grade VFSTX
International Bonds 10.00% Oppenheimer International Bond A OIBAX
Large Cap Growth 10.00% Ivy Capital Appreciation WMEAX
International Stock 10.00% Thornburg International Value A TGVAX
Emerging Markets 5.00% Lazard Emerging Markets LZOEX
Small Cap Value 5.00% Keeley Small Cap Value KSCVX
International Small Cap 5.00% Forward International Small Company PISRX
High Yield 5.00% Principal High Yield CPHYX
Specialty Natural Resources 5.00% Ivy Global Natural Resources IGNAX
Cash 2.00% Federated Capital Reserves FCR
This is the generic 60/40 portfolio I use.
 
Honestly that is a wacky porfolio. It seems to me that your volatility assumptions are off to get an “optimal” portfolio that allocates 20% each to EM and SC. I would review your assumptions. I couldn’t disagree more with regard to your EM comment (“I know EM is way too high but over the long-term is probably the right thing to do”). A market weight to EM is fine but the risk premium does not call for much more then that.
I also would avoid active management with regard to all equities. For every paper you try to show me that active managment is worth it, I’ll show you a better one that says you are more likely to underperform the index when you account for fees. The following comments are from a NPR interview with David Swenson:
Swensen says: If you’re not already in the market through index funds, he says you should sell your actively managed funds and buy index funds.
Index funds have very low fees because you’re not paying anybody to pick stocks. They basically track the market as a whole, rising and falling the same way as, for example, the Dow does. Swensen says that if you’re not a professional managing billions of dollars like him, it’s almost impossible to beat these market indexes.
That’s because most so-called actively managed mutual funds — the ones that pay managers to pick stocks — charge such high fees that the fees more than eat up the added returns they’re able to achieve, he says. So, in effect, you’re losing money by paying for this active management, Swensen says.
Swensen has done some research on this point. He and others have found the odds are 100 to 1 that you’re better off in an index fund.
Swensen says that over 30 years or so, even people with average incomes would end up with hundreds of thousands of more dollars when they retire if they avoided the fees that many actively managed mutual funds and investment advisers charge.
As for his friend who needed advice, Swensen says he’s put him in touch with a financial adviser at TIAA-CREF who is getting him into index funds. Swensen says TIAA-CREF and Vanguard are both basically not-for-profit fund companies and have much lower fees.
 
Yep. I know. That’s what sucks about MVO it gives you wacky results. Then you have to start constraining the crap out of it and then what’s the point. I guess I’ll flow the overweights back towards large cap and look like everyone else.
So how do you differentiate yourself if you have a standard cookie cutter allocation and use passive managers entirely. I need to get paid!
 
Chuckrox8 Wrote:
——————————————————-
> Intermediate Term Bonds 18.00% Principal Inv
> Income A CMPIX
> Large Cap Value 15.00% Eaton Vance Large Cap Value
> A EHSTX
> Short Term Bonds 10.00% Vanguard Short Term
> Investment Grade VFSTX
> International Bonds 10.00% Oppenheimer
> International Bond A OIBAX
> Large Cap Growth 10.00% Ivy Capital
> Appreciation WMEAX
> International Stock 10.00% Thornburg International
> Value A TGVAX
> Emerging Markets 5.00% Lazard Emerging
> Markets LZOEX
> Small Cap Value 5.00% Keeley Small Cap
> Value KSCVX
> International Small Cap 5.00% Forward
> International Small Company PISRX
> High Yield 5.00% Principal High Yield CPHYX
> Specialty Natural Resources 5.00% Ivy Global
> Natural Resources IGNAX
> Cash 2.00% Federated Capital Reserves FCR
>
> This is the generic 60/40 portfolio I use.
How much are you adding in as an advisory fee with this set up? Thanks.
 
Never more than 1.00%. Declining fee schedule.
<1MM 1%
1-3MM .80%
3-5MM .65%
5MM+ .50%
Also, that portfolio returned -26.5% in 2008 excluding advisory fees if I remember correctly. The two Ivy funds may be replaced after this quarter if their performance does not improve. The manager of the Ivy Capital Appreciation apparently had a nervous breakdown after getting dinged so badly in ‘08. That comes from our Ivy wholesaler. If your wholesaler is telling you bad news about his funds it’s probably time to bail. For his sake, at least LCG is outperforming in ‘09. The Natural Resources fund had great performance until the commodity bubble imploded last summer. He keeps betting the wrong way on oil. There aren’t a lot of great Natty Resource funds available so it will be hard to replace.
 
You must log in or register to reply here.
Back
Top