Strategic Asset Allocation
Designing a strategic asset allocation requires skill and mature investment judgment because the issues are complex, business and financial markets are inherently uncertain, and often there are multiple objectives and competing interests to balance. To facilitate informed decision-making, Greycourt constructs granular after-tax cash flow models that help resolve the complexities associated with each client’s particular situation. Given the many uncertainties in life and investing that cannot be eliminated, we build empirical models that help us remove as many of the cognitive illusions and intuitive emotions as possible that cloud what is already a difficult decision-making process.
Greycourt addresses two primary questions throughout our asset allocation work with clients. First, we ask how large will the portfolio likely be at various points in time taking into account all relevant fees, taxes, and spending needs. Second, we run tests to see if the portfolio will be able to generate sufficient cash flows to meet projected spending needs while supplying the stability necessary to survive severe market conditions and crises. Our strategic asset allocation approach involves a sophisticated blending of the market’s current pre-tax implied returns and risks with Greycourt’s prospective views of relative value using a probability framework that appropriately combines the two. Subsequently, pre-tax inputs are adjusted to after-tax before identifying plausible portfolios.
All inputs are regularly reviewed and estimated on a prospective basis. Expected returns for a global portfolio are constrained by expected global real GDP growth and inflation; the input variance-covariance matrices are estimated across consistent time frames as well as during disrupted economic and market environments to explore the impact of crisis periods on our analysis. With these key inputs in place, we customize the design to each client’s tax circumstances, specific cash flow requirements, existing or planned estate planning vehicles, and existing exposure to external assets such as operating businesses or directly-held private assets.