Strategic Asset Allocation: Combining Science and Judgment to Balance Short-Term and Long-Term Goals

Posted: 12 Mar 2016 Last revised: 16 Jul 2017

Peng Wang

TIAA Institute - Covariance Capital Management

Jon Spinney

Vestcor Investment Management

Date Written: May 18, 2017

Abstract

The authors build on traditional mean-variance optimization with a quantitative framework for combining the best of science and judgment in selecting an asset allocation for long horizon investors such as endowments. The novelty of their approach lies in its ability to balance the desire for long-term returns with the need to manage short-term risk and funding constraints, important goals but often in conflict. In order to reap the benefits of long-term risk premia, investors must be able to withstand occasional short-run painful drawdowns. The authors show how their unified approach can be used to examine how different combinations of asset classes, spending rates, and even alpha impact the policy portfolio over various planning horizons. The framework merges the science of portfolio optimization with a structure that informs sound judgment in determining an organization’s strategic asset allocation and spending policies.

Keywords: Asset allocation, policy portfolio, risk, alpha, spending, endowment

JEL Classification: G11

Suggested Citation

Wang, Peng and Spinney, Jon, Strategic Asset Allocation: Combining Science and Judgment to Balance Short-Term and Long-Term Goals (May 18, 2017). Available at SSRN: https://ssrn.com/abstract=2746001 or http://dx.doi.org/10.2139/ssrn.2746001

Peng Wang (Contact Author)

TIAA Institute - Covariance Capital Management ( email )

1221 McKinney St. Suite 1800
Houston, TX 77010
United States

Jonathan Spinney

Vestcor Investment Management ( email )

440 King Street
York Tower #581
Fredericton, New Brunswick E3B 5H8
Canada
(506) 444-3692 (Phone)

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