Professional Documents
Culture Documents
Rich Weiss
Senior Vice President
Senior Portfolio Manager
• Effective Diversification
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“To” versus “Through” Design
Age and Risk: Competing Academic Theories
Risk
Exposure
(Tolerance)
Age
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“To” versus “Through” Design
Age, Wealth, and Risk
Accumulation Distribution
Wealth
r*
Age
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“To” versus “Through” Design
Convex or Concave?
“Through”
Glide Path
Wealth Risk
“To” Glide Tolerance
Path
r*
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“To” versus “Through” Design
Our Position
retirement “success”
r*
• Statistical analysis shows significant differences in probability of
running out of money in retirement
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Asset Allocation: The Glide Path Debate
Three Current Issues
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Optimal Equity (Risk) Exposure
Rule of Thumb
e* = (100 – Age)
where e* = optimal equity exposure
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Optimal Equity (Risk) Exposure
Longevity Risk: Scenario #1
80%
60%
40%
80%
Equity
20% 60%
Allocatio
40%
n
20%
Percenta
0% ge
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Years in Retirement
Data as of 7/31/2010
10078 Source: Bloomberg
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Optimal Equity (Risk) Exposure
Longevity Risk: Scenario #2
Equity
80% 40% Allocatio
n
60% Percenta
80% ge
60%
40%
20%
0%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Years in Retirement
Data as of 7/31/2010
10078 Source: Bloomberg
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Optimal Equity (Risk) Exposure
Longevity Risk: Scenario #3
80% n
80% Percenta
ge
60%
40%
20%
0%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
Years in Retirement
Data as of 7/31/2010
10078 Source: Bloomberg
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Optimal Equity (Risk) Exposure
The “Sweet Spot”
Risk
Exposure
45%
35%
r*
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Asset Allocation: The Glide Path Debate
Three Current Issues
• Effective Diversification
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Asset Class Performance Over Time
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
66.41% 31.84% 13.93% 25.91% 56.28% 31.58% 34.54% 35.06% 39.78% 12.81% 79.02%
26.96% 26.37% 8.96% 20.13% 47.25% 25.95% 21.36% 32.59% 16.23% 5.08% 55.19%
26.47% 10.12% 5.44% 9.84% 38.59% 20.25% 13.54% 26.34% 11.17% 1.77% 31.78%
24.35% 6.08% 4.07% 3.82% 37.13% 18.33% 12.16% 18.37% 11.00% 21.39% 27.99%
21.26% 4.07% 2.80% 1.70% 30.62% 13.55% 8.70% 15.80% 10.27% -24.40% 27.17%
21.04% 3.71% 2.49% 1.01% 28.70% 10.93% 7.50% 15.19% 8.24% -25.91% 26.47%
16.81% -3.02% -2.03% -0.33% 27.02% 10.87% 4.91% 11.85% 7.39% -33.79% 26.05%
4.80% -3.46% -2.37% -1.53% 23.93% 10.79% 4.55% 10.39% 5.49% -35.65% 18.91%
1.73% -5.68% -4.87% -6.00% 16.73% 9.15% 3.00% 5.74% 4.78% -37.00% 11.47%
0.39% -9.11% -11.88% -15.94% 11.62% 6.87% 2.08% 4.80% 1.84% -37.73% 5.24%
-3.91% -14.17% -19.51% -20.48% 4.31% 3.04% 1.58% 4.08% -1.57% -43.38% 3.14%
-4.62% -30.61% -21.44% -22.10% 1.03% 1.24% -9.49% 2.07% -15.69% -53.18% 0.15%
Cash Core Bond High Yield Bonds Russell 2000 S&P 500 Diversified Portfolio
Int'l Bonds EAFE EmergingMarkets REITS Hedge Funds Commodities
Data as of 7/31/2010
10078 Source: Bloomberg
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Performance of a Diversified Portfolio Over Time
Diversification remains an investor’s best friend
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
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Diversification
The Obvious Benefits
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Real Estate Diversification
Increased interest rate sensitivity
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Geographical Diversification
Country versus Industrial Sector Concentration
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Natural Resource Diversification
Commodities, Contango, and Costs
1.5
Index
0.5 Spot
Spot + Collateral
0
Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10
Data as of 7/31/2010
Source: Bloomberg
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Volatility Diversification
Trees-on-a-Lake Imagery
Data as of 7/31/2010
Source: Bloomberg
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Volatility Diversification
Buying “Insurance”
100
80
60
0
1
f$w
thG
ro
40
VIX--monthly % change
0
Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10
Data as of 7/31/2010
Source: Bloomberg
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Asset Allocation: The Glide Path Debate
Summary
• “To” versus “Through” Design
– Governed by wealth level, among other factors (including age)
– Convex, “to” retirement paths best balance market and longevity risks
• Optimal Equity (Risk) Exposure
– Complex function of risk, return, time horizon, withdrawal rate, et. al.
– Sweet spot at retirement centers around 35% - 45%
– Higher risk is not an antidote to inadequate savings
• Effective Diversification
– Remains an investor’s best friend
– Not always a free lunch
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Thank you
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