A hypothetical large services company with a $250M defined benefit pension plan is looking for a solution in which an aggressive asset allocation "reaches" for their 8.5% return on asset (ROA) target.





Our first step is to work with the client to identify an optimal beta (systematic, or market exposure) portfolio which meets the bulk of the ROA target at a comfortable level of risk. The proposed asset allocation has exposure to broad asset classes such as US equities, international developed and emerging equities, fixed income, and real estate and is structured at capital market weights within each asset class, as a starting point. As we iterate with the client to refine the proposed asset allocation we incorporate tilts away from capital market weights consistent with the client's investment policy and strategy. This portfolio includes a 10% allocation to alternative assets and provides 80% of the return target (roughly 7.00% out of 8.50%).

Next we construct a portfolio of alpha (skillful actively managed strategies) which is used to implement the asset allocation policy portfolio designed above. It is critical that the alpha strategies do not distort the carefully engineered strategic asset allocation portfolio by introducing uncompensated biases. The alpha portfolio employs risk-controlled active, partial long/short (i.e. 130/30) strategies, and portable alpha strategies. The net result is an alpha portfolio which is designed to deliver the remaining 20% of the ROA target (roughly 1.5% of 8.50%).

The beta and alpha portfolios are each designed to be risk/return efficient and sensibly assembled. Taken together, the two portfolios are structured to meet the 8.50% ROA target and designed to provide the flexibility to make alterations easily, in a cost-effective method.