David
My name is David Marshall and I'm joined by Rob Spencer.
So, let's start by talking about strategic asset allocation. The approach that we employ is both quantitative and qualitative.
So, let me tell you about the first thing that makes our approach a little bit different. Generically, obviously, strategic asset allocation is about setting an asset class mix for long-term financial goals and for meeting long-term risk tolerances. However, there's some deviations to our review. We estimate 10-year returns, for example. Which is different from other approaches that might take the market-based approach or just take the allocations that the market provides.
The other thing that we do, which is different than others, is we employ several asset classes that are somewhat nuanced. You might see commodities in our portfolios, small cap international, or even REITs, for example.
In terms of expectations on these portfolios, effectively, we're trying to create a better benchmark, if you will. We're trying to produce slightly better returns relative to the benchmark and maybe similar risks.
Rob, can you provide some insights on our tactical asset allocation portfolio?
Rob
Sure, David. So tactical asset allocation differs from strategic allocation because we're pulling the levers of asset allocation actively to try to add some additional value above the strategic benchmark.
Now at SSGA, we employ a process that is very much anchored in a quantitative approach. We have a variety of tools that we've developed in house to help us, but we also can refine them with the insights of our team of experts.
Now, we also take a nuanced approach overall in deciding what kind of opportunities we want to exploit. For instance, we segment broad-based asset class comparisons — so think equities versus bonds, high yield, cash, and gold — what we refer to as directional — from intra-asset class or what we call relative value. So within equities think sector and region, within fixed income: rates, and credit. And the reason that we do that is it allows us to take those quantitative and discretionary tools at our disposal and execute it in a very focused and precise way.
David
So, if there's advisors that are considering both tactical and strategic portfolios, what are some considerations that they should be making?
Rob
Sure. So, tactical allocation can enhance the return expectation potentially that you get with strategic allocation.
So, think of it as a building block approach. So, the reason that clients will employ tactical asset allocation is that it has the potential to generate excess return above the strategic allocation.
And what's more, is that excess return tends to have a lower level of correlation with other sources of excess return, or alpha, like security selection. And what that means is they can be used as a building block approach ultimately to get to the client's return objective.
Finally, there's an element of risk management inherent in tactical asset allocation where we can reign risk in, in periods of dislocation and maybe take a little bit more risk when things are looking very good.
David
So, today we talked about tactical and strategic asset allocation. We talked about obviously differences in time horizons, differences in return expectations, and why you might use tactical versus strategic portfolios.
My name is David Marshall and I'm here with Rob Spencer. Thank you.
