Multi Asset Class Investment Strategy (The Wiley Finance Series)

The book explains that instead of asset allocation being set in an isolated and arbitrary fashion, it is in fact the way in which specific hurdle investment returns can be targeted, and that this approach is already in use in the US (and has been for many years). It involves extended and detailed financial analysis of various asset class returns and proposes a five-asset class approach for future use. Opening with a study of the historic asset allocation practice of UK pension funds, the book shows how the current approach has led to the present funding crisis. It goes on to compare and contrast the UK approach with that of the US and to propose a new approach to UK asset allocation: the five asset class approach ("MAC Investing”). The book reviews and analyses different asset classes based on historic returns, examines risk, and concludes with a suggestion of the five asset classes to use; Quoted equities (both Domestic and foreign), hedge funds, private equity and property. This book also includes benchmark performance figures never previously published. Cover......Page 1 Contents......Page 7 Introduction......Page 13 Acknowledgements......Page 21 WHAT IS STRATEGY?......Page 23 WHAT IS INVESTMENT STRATEGY?......Page 24 1. Real and Artificial Liabilities......Page 26 2. Mapping the Liability Cashflows......Page 29 3. Total Funding......Page 31 4. The Escalator Factor......Page 33 5. Putting it Together......Page 40 CONCLUSIONS......Page 41 SUMMARY......Page 43 THE ASSET ALLOCATION BACKGROUND......Page 45 POTENTIAL PROBLEMS IN MOVING TO A MULTI ASSET CLASS APPROACH......Page 47 Higher Returns as a Goal, not Peer Group Benchmarking......Page 48 LIQUIDITY......Page 50 DIVERSIFICATION......Page 51 LONG-TERM RETURNS......Page 53 Bonds......Page 54 HOW MUCH SHOULD BE ALLOCATED TO EACH ASSET CLASS?......Page 56 HOW IS THE YALE MODEL CURRENTLY ALLOCATED?......Page 57 Is there a Sufficiently Robust Benchmark Available for the Asset Class?......Page 59 CONCLUSIONS......Page 62 SUMMARY......Page 63 INTRODUCTION......Page 65 THE ATHEIST CATHEDRAL......Page 66 RISK AND THE CAPITAL ASSET PRICING MODEL......Page 71 HOW ‘RISK’ IS USED IN PRACTICE......Page 74 ARITHMETICAL PROBLEMS WITH BETA......Page 76 CONCEPTUAL PROBLEMS WITH BETA......Page 81 WHY BETA AND THE CAPM ARE IRRELEVANT......Page 85 SUMMARY......Page 87 4: How to Define Risk......Page 89 RISK AND UNCERTAINTY......Page 90 RISK AND DIVERSIFICATION IN THE ARTIFICIAL WORLD......Page 92 RISK IN THE REAL WORLD: UNCERTAINTY AND MATERIALITY......Page 94 TOWARDS A NEW DEFINITION OF RISK......Page 96 Return Risk......Page 99 SUMMARY......Page 106 PHI CALCULATIONS......Page 109 PHI AND BETA......Page 110 COMPOUND RETURN-BASED MODELLING......Page 113 THE FUTURE OF RISK ANALYSIS......Page 117 DIRECT COMPARISON OF DIFFERENT ASSET CLASSES......Page 120 OTHER TYPES OF RISK......Page 122 SUMMARY......Page 124 6: Quoted Equity......Page 125 ACTIVE VERSUS PASSIVE EQUITIES MANAGEMENT......Page 126 WHICH INDICES SHALL WE EXAMINE?......Page 133 WHAT CORRELATION IS THERE BETWEEN QUOTED MARKETS?......Page 134 Correlation and the Dollar Investor......Page 136 Correlation and the Sterling Investor......Page 139 RETURN RISK OF QUOTED EQUITIES......Page 140 HOW TO IMPROVE QUOTED EQUITY RETURNS......Page 144 SUMMARY......Page 151 WHAT IS A HEDGE FUND?......Page 153 HEDGE FUND INVESTMENT STRATEGIES......Page 156 WHAT BENCHMARKS ARE AVAILABLE AND WHICH SHOULD WE USE?......Page 160 How do the Various Hedge Fund Strategies Compare?......Page 163 What Return Risk is Present in Hedge Funds?......Page 165 Does the Index Properly Show Potential Portfolio Returns?......Page 168 HEDGE FUNDS WITHIN THE YALE PORTFOLIO......Page 170 WHAT CAPITAL RISK IS PRESENT IN HEDGE FUNDS AS AN ASSET CLASS?......Page 173 HOW ARE HEDGE FUND RETURNS CORRELATED WITH THOSE FOR QUOTED EQUITY?......Page 175 SUMMARY......Page 176 8: Private Equity......Page 177 VENTURE CAPITAL......Page 178 Stage......Page 179 Sector......Page 181 Geography......Page 183 VINTAGE YEAR VERSUS ANNUAL RETURNS......Page 190 FURTHER COMPLEXITIES OF PRIVATE EQUITY RETURNS......Page 192 What Return Risk is Present in Private Equity?......Page 194 What Capital Risk is Present in Private Equity?......Page 198 How do we Address the Slow Capital Take-up Issue?......Page 199 SUMMARY......Page 202 INVESTING IN PROPERTY......Page 205 Geography......Page 206 Sector......Page 207 Specialist Quoted Vehicles......Page 210 Private Institutional Funds (Limited Partnerships)......Page 213 What Level of Correlation Exists with Quoted Equity Returns?......Page 214 What Levels of Return Risk and Capital Risk does UK Property Exhibit?......Page 215 HOW HAVE RETURNS VARIED BY SECTOR?......Page 218 CAN PROPERTY RETURNS BE IMPROVED BY LEVERAGE?......Page 221 Analysing the Possible Effect of Leverage on a Property Portfolio......Page 225 SUMMARY......Page 229 WHAT IS ‘LIABILITY DRIVEN INVESTMENT’?......Page 231 THE DIFFERING POSITIONS OF THE PENSION PLAN AND THE EMPLOYER......Page 233 HOW DOES LIABILITY MATCHING HELP?......Page 235 Why Liability Matching does Not Work......Page 237 THE PENSION PLAN AS CREDITOR......Page 238 THE STRATEGIC DILEMMA......Page 240 PORTABLE ALPHA......Page 242 THE CONCEPT......Page 243 Problem 1: The Traditional Risk Model......Page 244 Problem 3: Exactly What is Being Suggested?......Page 246 Problem 4: Alpha Returns......Page 248 SUMMARY OF PORTABLE ALPHA......Page 249 RIVAL STRATEGIES?......Page 250 11: Liquidity......Page 253 CREATING ARTIFICIAL LIQUIDITY......Page 254 WHY DO INSTITUTIONAL INVESTORS NEED LIQUIDITY, AND HOW MUCH LIQUIDITY DO THEY NEED?......Page 255 ARE SO-CALLED ALTERNATIVE ASSETS REALLY ILLIQUID? AND, IF SO, JUST HOW ILLIQUID?......Page 258 Hedge Funds: Liquidity Considerations......Page 259 Private Equity: Liquidity Issues......Page 261 Property: Liquidity Issues......Page 263 Liquidity of So-called Alternative Assets......Page 264 IRRATIONALITY OF LIQUIDITY CONCERNS......Page 265 SUMMARY......Page 266 12: Portfolio Performance......Page 267 COST-ADJUSTED PERFORMANCE......Page 269 WHAT RETURNS WILL WE USE?......Page 272 PARAMETERS OF THE MODEL......Page 273 Relative Performance......Page 274 WHAT ABOUT REBALANCING?......Page 278 ARE PRIVATE EQUITY RETURNS MODELLED REALISTICALLY?......Page 281 CONCLUSIONS......Page 285 Appendix 1: Tables of Performance Figures......Page 289 Appendix 2: Investment Strategy for DC Schemes and Mature Pension Plans......Page 295 Index......Page 307

The book explains that instead of asset allocation being set in an isolated and arbitrary fashion, it is in fact the way in which specific hurdle investment returns can be targeted, and that this approach is already in use in the US (and has been for many years). It involves extended and detailed financial analysis of various asset class returns and proposes a five-asset class approach for future use.

Opening with a study of the historic asset allocation practice of UK pension funds, the book shows how the current approach has led to the present funding crisis. It goes on to compare and contrast the UK approach with that of the US and to propose a new approach to UK asset allocation: the five asset class approach ("MAC Investing").

The book reviews and analyses different asset classes based on historic returns, examines risk, and concludes with a suggestion of the five asset classes to use; Quoted equities (both Domestic and foreign), hedge funds, private equity and property. This book also includes benchmark performance figures never previously published.

GUY FRASER-SAMPSON has twenty years' experience of the investment industry across a range of asset classes, most notably private equity. His career has included a spell as Investment Controller with the Abu Dhabi Investment Authority, and setting up and running for several years the European operations of one of the world's leading fund of funds managers. Guy is a well-known figure on the conference circuit, both as a speaker and as a panellist. His first major speech on MAC investing (to the UK's National Association of Pension Funds in 2005) sparked media attention around the globe and helped "Multi Asset Class Investment Strategy shows how unthinking mistrust of so-called 'alternative' assets, and an inability validly to compare results across asset classes on any traditional risk-adjusted basis, has led to institutional investors, particularity pension funds, missing out on the out-performance which a multi asset class approach can offer."--Jacket