Economic-Scenario

Economic Scenarios

Asset allocation should be should be determined based on the “intentions of” and “objectives for” the pool of assets. The portfolio objectives are expressed through our four economic scenario buckets. They are broadly categorized into: Capital Growth, Real Return, Volatility Management, and Income.

Capital Growth

The Capital Growth bucket is designed to contain exposure to global equity investments. Capital Growth investments are expected to be linked to global economic cycles. Investments in this segment will be equity oriented and will include both domestic and international allocations. These investments are expected to have the highest returns coupled with the highest volatility. Furthermore, the Capital Growth segment is also an effective hedge against the ravages of long term inflation.

Allocations in the proposed model portfolios have been constructed to be global in nature and represent a split between domestic and non-US equity, including developed, emerging, and frontier markets countries. A core-satellite manager structure has been utilized whereby low-cost index instruments provide market exposure (beta) and liquidity while specialist and niche managers provide diversification and potential alpha generation. Although an alternative and illiquid asset class, private equity falls within the capital growth bucket.

Real Return

The Real Return bucket is designed to provide exposure to assets that are expected to preserve purchasing power in inflationary environments. Investments in this segment are constructed to provide some level of positive correlation with broad measures of inflation such as the Consumer Price Index (CPI) while also preserving long term purchasing power by generating positive real returns.

The implementation of this segment begins with a carefully constructed blend of TIPS, Commodities/Managed Futures, Real Estate, and Natural Resource Equities. The Callan R3 (Rebalanced Real Return) strategy we utilize for the core of this portfolio contains a portfolio of liquid ETFs and funds that are aggressively rebalanced to capture the potential return premium offered by blending volatile and uncorrelated assets. As assets allocated to the Real Return bucket increase, so does the complexity of the implementation. Core Private Real Estate, Value Added Real Estate, and Master Limited Partnerships (MLPs) serve to further diversify the implementation and increase the inflation protection aspects provided.

Volatility Management

The Volatility Management bucket is designed to dampen overall portfolio volatility and provide exposure to less correlated investment strategies and highly skilled professional investment managers. Volatility management investments are often niche strategies with less equity directionality achieved through aggressive hedging. Access to these less directional and less volatile strategies is taken through Hedge Fund related products.

Implementation vehicles for the Volatility Hedge segment are primarily hedge fund beta ETFs for smaller allocations, and single manager Hedge Funds and Hedge Fund of Funds for larger allocations. Hedge Fund investments include allocations to long/short equity, absolute return, market neutral, global macro, event-driven, and other broadly diversified strategies.

Income

The Income bucket is designed to provide current income to the portfolio and to serve as a volatility dampener. Furthermore, the Income bucket is also an effective hedge against deflationary environments. Income investments should provide current income and reasonable stability of principal. Investments in this segment will be fixed income oriented and will include instruments across the credit quality spectrum and will include both domestic and non-US exposures. The primary drivers of returns for Income investments will include interest rates, credit spreads, and global currency fluctuations.

The manager structure utilized in this segment includes significant exposure to US core fixed income while also providing exposure to diversifying and alpha generating elements including foreign developed and emerging non- dollar bonds and absolute return oriented products.

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