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Multi Asset Class Investment Strategy

Multi Asset Class Investment Strategy

Guy Fraser-Sampson

ISBN: 978-0-470-02799-8 July 2006 320 Pages


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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.

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1. Investment Strategy.

What is strategy?.

What is investment strategy?.

Planning to achieve the objective.

1. Real and artificial liabilities.

2. Mapping the liability cashflows.

3. Total funding.

4. The escalator factor.

5. Putting it together.



2. Multi Asset Class Investing.

The asset allocation background.

Potential problems in moving to a Multi Asset Class approach.

The Yale Model.

Higher returns as a goal, not peer group benchmarking.



Long-term returns.

The Yale Model and MAC investing.


Quoted equities.

How much should be allocated to each asset class?.

How is the Yale Model currently allocated?.

What does one look for in selecting an asset class?.

Is there a sufficiently robust benchmark available for the asset class?.

Based on the benchmark, does it exhibit an acceptable level of return risk?.

Based on the benchmark, does it exhibit an acceptable level of capital risk?.

Based on the benchmark, does it exhibit an acceptable level of correlation with domestic quoted equities?.



3. Risk.


The atheist cathedral.

Risk and the capital asset pricing model.

How ‘risk’ is used in practice.

Arithmetical problems with beta.

Conceptual problems with beta.

Why beta and the CAPM are irrelevant.


4. How to Define Risk.

Risk and uncertainty.

Risk and diversification in the artificial world.

Risk in the real world: uncertainty and materiality.

Towards a new definition of risk.

Return risk.

Capital risk.


5. How to Calculate Risk.

Phi calculations.

Phi and beta.

Compound return-based modelling.

The future of risk analysis.

Direct comparison of different asset classes.

Other types of risk.


6. Quoted Equity.

Active versus passive equities management.

Which indices will we examine?.

What correlation is there between quoted markets?.

Correlation and the dollar investor.

Correlation and the sterling investor.

Return risk of quoted equities.

How to improve quoted equity returns.


7. Hedge Funds.

What is a hedge fund?.

Hedge fund investment strategies.

What benchmarks are available and which should we use?.

How do the various hedge fund strategies compare?.

What return risk is present in hedge funds?.

Does the index properly show potential portfolio returns?.

Hedge funds within the Yale portfolio.

What capital risk is present in hedge funds as an asset class?.

How are hedge fund returns correlated with those for quoted equity?.


8. Private Equity.

Venture capital.




Vintage year versus annual returns.

Further complexities of private equity returns.

What return risk is present in private equity?.

What capital risk is present in private equity?.

What degree of correlation does it exhibit with quoted equity markets?.

How does one address the slow capital take-up issue?.


9. Property.

Investing in property.

Investing in property (real estate) directly.



Investing in property indirectly.

Quoted property companies.

Specialist quoted vehicles.

Private institutional funds (limited partnerships).

What performance benchmarks should we use?.

What level of correlation exists with quoted equity returns?.

What levels of return risk and capital risk does UK property exhibit?.

How have returns varied by sector?.

Can property returns be improved by leverage?.

Analysing the possible effect of leverage on a property portfolio.


10. LDI and Portable Alpha: Rival Strategies?.


What is ‘liability driven investment’?.

The differing positions of the pension plan and the employer.

How does liability matching help?.

Why liability matching does not work.

The pension plan as creditor.

The strategic dilemma.

Summary of LDI.


The concept.

Problem 1: The traditional risk model.

Problem 2: Pure alpha.

Problem 3: Exactly what is being suggested?.

Problem 4: Alpha returns.

Summary of portable alpha.

Rival strategies?.

11. Liquidity.

Creating artificial liquidity.

Why do institutional investors need liquidity, and how much.

liquidity do they need?.

Are so-called alternative assets really illiquid? And, if so, just how illiquid?.

Hedge funds: Liquidity considerations.

Private equity: Liquidity issues.

Property: Liquidity issues.

Liquidity of so-called alternative assets.

Irrationality of liquidity concerns.


12. Portfolio Performance.

Cost-adjusted performance.

What returns will we use?.

Parameters of the model.

Relative performance.

What about rebalancing?.

Are private equity returns modelled realistically?.


Appendix 1: Tables of Performance Figures.

Appendix 2: Investment Strategies for DC Schemes and Mature Pension Plans.


""...pension fund trustees right around the globe should read the book...the book is certain to stir up some much needed debate..."" (Global Pensions, July 2006)

"" indispensable roadmap for anyone looking to create a successful investment programme..."" (The Securities Investment Review, July 2006)

""...a popular choice...drawing on over 20 years of experience...."" (Pensions Management, July 2006)

""clear and punchy...argues convincingly...this book cannot but help to clarify your thinking."" (Benefits and Compensation International, August 2006)

""On the other side of the fence...Guy Fraser-Sampson...the lack of interest in the Yale model."" (Financial Times, November 2006)