Asset Allocation and Portfolio Construction

Jen Cook

Asset Allocation & Portfolio Construction

Our approach to portfolio construction starts with understanding our client’s goals and financial realities. Their time horizon, risk tolerance and whether the account is taxable or tax exempt dictate which asset classes should be included. The second step involves robust modeling of risk and correlation to understand how different securities are best paired and weighted. Finally, and equally important, is the selection of the specific manager and investment vehicle we believe has the ability to achieve the desired returns, consistently over time.

True Diversification

When it comes to selecting the correct asset classes for our clients, we advocate for the inclusion of complementary assets along with traditional stocks and bonds, because we believe that merely balancing stocks and bonds leaves risk on the table. We’re proponents of forward-thinking portfolios that include a broad range of investments.

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Modeling the Portfolio

Effectively combining these asset classes requires sophisticated analytics. Institutional investors who have been utilizing complementary assets for decades, model portfolios using theories like Mean Variance Optimization, Black-Litterman, Risk Parity or Equal Volatility. Cash flows and expected returns over time are modeled using Monte Carlo analysis. Our portfolio management process uses the advanced asset allocation tools developed by Cliffwater’s team over the past 35 years. We believe this is a significant advantage to our clients and a key differentiator between New Market Wealth Management and other wealth management firms.

Additionally, because Cliffwater’s asset allocation tools are proprietary and developed internally, they allow for the development of advanced solutions ahead of commercially available software. We use these systems to develop customized portfolio solutions for our clients. We model potential portfolios so clients can see what to expect in the way of returns and cash flows based on certain assumptions. This includes expected as well as worst case scenarios. Our process involves extensive stress testing for multiple types of risk including access to funds during a liquidity crisis.

Of course, a modeling tool is only as good as the inputs – we use long term asset class forecasts and strategic asset allocation recommendations on an annual basis, with shorter term, tactical forecasts reviewed quarterly.

Portfolio Construction Process

Investment Vehicles

When it comes to the actual investments, we believe that some asset classes are most efficiently represented with passive, low fee options like index funds and ETFs (Exchange Traded Funds.) However, there are areas of the market where we believe highly specialized management teams can add significant value. Finding these teams and performing on-going due diligence is a responsibility we take very seriously.